**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

**ý****Quarterly Report Pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterlyperiod ended June 30, 2005.**

 

**Or**

 

**o****Transition Report Pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934 for thetransition period from                                                                to                                                               **

 

**Commission File Number 000-50266**

 

**TRINITY CAPITAL CORPORATION**

(Exact name of registrant asspecified in its charter)

 
| **New Mexico**           | ** ** | **85-0242376**                          |
|--------------------------|------------|-----------------------------------------|
| (State of incorporation) |       | (I.R.S. Employer Identification Number) |

 

**1200 Trinity Drive, Los Alamos, New Mexico87544**

(Address of principal executive offices)

 

**(505) 662-5171**

Telephone number

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes ýNo o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Securities Exchange Act of 1934). Yes ý No o

 

APPLICABLEONLY TO CORPORATE ISSUERS:

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date: 6,630,378 shares of common stock, no parvalue, outstanding as of July 15, 2005.

 

 

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**TRINITY CAPITAL CORPORATION AND SUBSIDIARIES**

 
| ** ** | **PART I.  FINANCIAL INFORMATION**                                                          | ** ** |
|------------|---------------------------------------------------------------------------------------------|------------|
| ** ** | ** **                                                                                  | ** ** |
| Item 1.    | Financial Statements                                                                        |       |
|       |                                                                                        |       |
| Item  2.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       |
|       |                                                                                        |       |
| Item  3.   | Quantitative  and Qualitative Disclosures About Market Risk                                 |       |
|       |                                                                                        |       |
| Item  4.   | Controls  and Procedures                                                                    |       |
|       |                                                                                        |       |
| ** ** | **PART II. OTHER INFORMATION**                                                              | ** ** |
| ** ** | ** **                                                                                  | ** ** |
| Item 1.    | Legal Proceedings                                                                           |       |
|       |                                                                                        |       |
| Item 2.    | Unregistered Sales of Equity  Securities and Use of Proceeds                                |       |
|       |                                                                                        |       |
| Item 3.    | Defaults upon senior securities                                                             |       |
|       |                                                                                        |       |
| Item 4.    | Submission of Matters to a  Vote of Securities Holders                                      |       |
|       |                                                                                        |       |
| Item 5.    | Other information                                                                           |       |
|       |                                                                                        |       |
| Item  6.   | Exhibits                                                                                    |       |
|       |                                                                                        |       |
|       | SIGNATURES                                                                                  |       |

 

1

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**PART I – FINANCIAL INFORMATION**

**Item 1.  FinancialStatements**

**TRINITY CAPITAL CORPORATION &SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**June 30, 2005 and December 31, 2004**

**(Amounts in thousands, except share data)**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                                                                                                                                               | ** ** | **June 30, 2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                                                                                               | ** ** | ** **        | ** ** | ** **             | ** ** |
| Cash and due from banks                                                                                                                                                                                                                                                                                                                  |       | $                 | 30,839     |                   | $          | 23,678 |   |
| Interest bearing deposits with banks                                                                                                                                                                                                                                                                                                     |       | 6,127             |       | 96                     |       |
| Federal funds sold and securities purchased  under resell agreements                                                                                                                                                                                                                                                                     |       | 577               |       | 40                     |       |
| **Cash and cash equivalents**                                                                                                                                                                                                                                                                                                            |       | 37,543            |       | 23,814                 |       |
| Investment securities available for sale                                                                                                                                                                                                                                                                                                 |       | 39,450            |       | 44,105                 |       |
| Investment securities held to maturity, at  amortized cost (fair value of $43,080 at June 30, 2005 and $61,883 at  December 31, 2004)                                                                                                                                                                                               |       | 43,098            |       | 61,658                 |       |
| Other investments                                                                                                                                                                                                                                                                                                                        |       | 7,923             |       | 7,480                  |       |
| Loans (net of allowance for loan losses of  $9,364 at June 30, 2005 and $8,367 at December 31, 2004)                                                                                                                                                                                                                                |       | 986,256           |       | 885,954                |       |
| Loans held for sale                                                                                                                                                                                                                                                                                                                      |       | 11,635            |       | 8,634                  |       |
| Premises and equipment, net                                                                                                                                                                                                                                                                                                              |       | 24,988            |       | 25,450                 |       |
| Accrued interest receivable                                                                                                                                                                                                                                                                                                              |       | 6,360             |       | 5,941                  |       |
| Mortgage servicing rights, net                                                                                                                                                                                                                                                                                                           |       | 8,162             |       | 8,371                  |       |
| Other real estate owned                                                                                                                                                                                                                                                                                                                  |       | 2,654             |       | 6,438                  |       |
| Other assets                                                                                                                                                                                                                                                                                                                             |       | 3,671             |       | 2,548                  |       |
| **Total assets**                                                                                                                                                                                                                                                                                                                         |       | $                 | 1,171,740  |                   | $          | 1,080,393 |   |
|                                                                                                                                                                                                                                                                                                                                     |       |              |       |                   |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                                                                            |       |              |       |                   |       |
| Liabilities                                                                                                                                                                                                                                                                                                                              |       |              |       |                   |       |
| Deposits:                                                                                                                                                                                                                                                                                                                                |       |              |       |                   |       |
| Noninterest bearing                                                                                                                                                                                                                                                                                                                      |       | $                 | 75,290     |                   | $          | 63,070 |   |
| Interest bearing                                                                                                                                                                                                                                                                                                                         |       | 895,512           |       | 817,511                |       |
| **Total deposits**                                                                                                                                                                                                                                                                                                                       |       | 970,802           |       | 880,581                |       |
| Short-term borrowings                                                                                                                                                                                                                                                                                                                    |       | —            |       | 34,400                 |       |
| Long-term borrowings                                                                                                                                                                                                                                                                                                                     |       | 86,196            |       | 60,006                 |       |
| Junior subordinated debt owed to unconsolidated  trusts                                                                                                                                                                                                                                                                                  |       | 32,992            |       | 22,682                 |       |
| Borrowings made by Employee Stock Ownership  Plan (ESOP) to outside parties                                                                                                                                                                                                                                                              |       | 1,214             |       | 1,686                  |       |
| Accrued interest payable                                                                                                                                                                                                                                                                                                                 |       | 3,184             |       | 2,768                  |       |
| Other liabilities                                                                                                                                                                                                                                                                                                                        |       | 4,645             |       | 5,314                  |       |
| **Total liabilities**                                                                                                                                                                                                                                                                                                                    |       | 1,099,033         |       | 1,007,437              |       |
| Stock owned by Employee Stock Ownership  Plan (ESOP) participants; 631,099 shares and 636,915 shares at June  30, 2005 and December 31, 2004, respectively, at fair value; net of unearned  ESOP shares of 73,347 shares and 98,318 shares at June 30, 2005 and  December 31, 2004, respectively, at historical cost |       | 16,880            |       | 18,078                 |       |
| Commitments and contingencies (Note 8)                                                                                                                                                                                                                                                                                                   |       |              |       |                   |       |
| Stockholders’ equity                                                                                                                                                                                                                                                                                                                |       |              |       |                   |       |
| Common stock, no par, authorized  20,000,000 shares; issued 6,856,800 shares, shares outstanding  6,630,378 and 6,732,748 at June 30, 2005 and December 31, 2004, respectively                                                                                                                                                 |       | 6,836             |       | 6,836                  |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                               |       | 945               |       | 997                    |       |
| Retained earnings                                                                                                                                                                                                                                                                                                                        |       | 52,277            |       | 47,849                 |       |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                                                                                     |       | (251              | )          | (200                   | )          |
| Total stockholders’ equity before treasury  stock                                                                                                                                                                                                                                                                                   |       | 59,807            |       | 55,482                 |       |
| Treasury stock, at cost, 153,075 shares and  25,734 shares at June 30, 2005 and December 31, 2004, respectively                                                                                                                                                                                                                     |       | (3,980            | )          | (604                   | )          |
| **Total stockholders’ equity**                                                                                                                                                                                                                                                                                                      |       | 55,827            |       | 54,878                 |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                                                                                                                                                                      |       | $                 | 1,171,740  |                   | $          | 1,080,393 |   |

 

The accompanying notes are an integral partof these unaudited consolidated financial statements.

 

2

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**TRINITY CAPITAL CORPORATION &SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

**For the Three and Six Months Ended June 30,2005 and 2004**

**(Amounts in thousands except share and pershare data)**

**(Unaudited)**

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                               | ** ** | **June 30, 2005**      | ** ** | **June 30, 2004**    | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
| Interest income:                                         |       |                   |       |                 |       |   |   |   |   |
| Loans, including fees                                    |       | $                      | 15,475     |                 | $          | 11,956 |   | $ | 29,697 |   | $ | 23,894 |   |
| Investment securities:                                   |       |                   |       |                 |       |   |   |   |   |
| Taxable                                                  |       | 574                    |       | 709                  |       | 1,230 |   | 1,682 |   |
| Nontaxable                                               |       | 179                    |       | 163                  |       | 359 |   | 321 |   |
| Federal funds sold                                       |       | 4                      |       | —               |       | 8 |   | — |   |
| Other interest bearing deposits                          |       | 79                     |       | 63                   |       | 99 |   | 69 |   |
| Investment in unconsolidated trusts                      |       | 15                     |       | 14                   |       | 31 |   | 27 |   |
| **Total interest income**                                |       | 16,326                 |       | 12,905               |       | 31,424 |   | 25,993 |   |
| Interest expense:                                        |       |                   |       |                 |       |   |   |   |   |
| Deposits                                                 |       | 4,761                  |       | 2,962                |       | 8,742 |   | 5,930 |   |
| Short-term borrowings                                    |       | 21                     |       | 28                   |       | 123 |   | 95 |   |
| Long-term borrowings                                     |       | 826                    |       | 591                  |       | 1,403 |   | 1,198 |   |
| Junior subordinated debt owed to  unconsolidated trusts  |       | 536                    |       | 472                  |       | 1,055 |   | 911 |   |
| **Total interest expense**                               |       | 6,144                  |       | 4,053                |       | 11,323 |   | 8,134 |   |
| **Net interest income**                                  |       | 10,182                 |       | 8,852                |       | 20,101 |   | 17,859 |   |
| Provision for loan losses                                |       | 825                    |       | 600                  |       | 1,350 |   | 1,200 |   |
| **Net interest income after provision for  loan losses** |       | 9,357                  |       | 8,252                |       | 18,751 |   | 16,659 |   |
| Other income:                                            |       |                   |       |                 |       |   |   |   |   |
| Mortgage loan servicing fees                             |       | 659                    |       | 585                  |       | 1,261 |   | 1,159 |   |
| Loan and other fees                                      |       | 709                    |       | 682                  |       | 1,297 |   | 1,239 |   |
| Service charges on deposits                              |       | 368                    |       | 339                  |       | 699 |   | 670 |   |
| Gain on sale of loans                                    |       | 638                    |       | 983                  |       | 1,101 |   | 1,999 |   |
| Gain on sale of securities                               |       | —                 |       | —               |       | — |   | 272 |   |
| Other operating income                                   |       | 319                    |       | 261                  |       | 395 |   | 528 |   |
|                                                     |       | 2,693                  |       | 2,850                |       | 4,753 |   | 5,867 |   |
| Other expenses:                                          |       |                   |       |                 |       |   |   |   |   |
| Salaries and employee benefits                           |       | 3,963                  |       | 3,855                |       | 8,021 |   | 7,708 |   |
| Occupancy                                                |       | 794                    |       | 574                  |       | 1,593 |   | 1,068 |   |
| Data processing                                          |       | 415                    |       | 499                  |       | 905 |   | 934 |   |
| Marketing                                                |       | 406                    |       | 324                  |       | 730 |   | 550 |   |
| Amortization and valuation of mortgage  servicing rights |       | 934                    |       | (1,097               | )          | 1,064 |   | (110 | ) |
| Supplies                                                 |       | 191                    |       | 209                  |       | 400 |   | 381 |   |
| Loss on sale of other real estate owned                  |       | 308                    |       | 41                   |       | 827 |   | 127 |   |
| Postage                                                  |       | 140                    |       | 103                  |       | 310 |   | 273 |   |
| Other                                                    |       | 1,142                  |       | 942                  |       | 2,101 |   | 2,048 |   |
|                                                     |       | 8,293                  |       | 5,450                |       | 15,951 |   | 12,979 |   |
| **Income before income taxes**                           |       | 3,757                  |       | 5,652                |       | 7,553 |   | 9,547 |   |
| Income taxes                                             |       | 1,316                  |       | 2,293                |       | 2,744 |   | 3,738 |   |
| Net income                                               |       | $                      | 2,441      |                 | $          | 3,359 |   | $ | 4,809 |   | $ | 5,809 |   |
| Basic earnings per common share                          |       | $                      | 0.37       |                 | $          | 0.50 |   | $ | 0.72 |   | $ | 0.86 |   |
| Diluted earnings per common share                        |       | $                      | 0.36       |                 | $          | 0.49 |   | $ | 0.71 |   | $ | 0.85 |   |

 

The accompanying notes are an integral part of these unauditedconsolidated financial statements.

 

3

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**TRINITY CAPITAL CORPORATION &SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the Six Months Ended June 30, 2005 and2004**

**(Amounts in thousands)**

**(Unaudited)**

 
| ** **                                                                                   | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                   | ** ** | **June 30, 2005**    | ** ** | **June 30, 2004** | ** ** |
| ** **                                                                                   | ** ** | ** **           | ** ** | ** ** | ** ** |
| Cash Flows From Operating Activities                                                         |       |                 |       |   |   |
| Net income                                                                                   |       | $                    | 4,809      |   | $ | 5,809 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |       |                 |       |   |   |
| Depreciation and amortization                                                                |       | 1,257                |       | 1,032 |   |
| Net amortization of:                                                                         |       |                 |       |   |   |
| Mortgage servicing rights                                                                    |       | 1,380                |       | 1,307 |   |
| Premiums and discounts on investment  securities                                             |       | 535                  |       | 725 |   |
| Junior subordinated debt owed to  unconsolidated trusts issuance costs                       |       | 10                   |       | 9 |   |
| Provision for loan losses                                                                    |       | 1,350                |       | 1,200 |   |
| Recovery of mortgage servicing rights                                                        |       | (316                 | )          | (1,417 | ) |
| Loss on disposal of premises and equipment                                                   |       | 143                  |       | — |   |
| Gain on sale of available for sale  securities                                               |       | —               |       | (272 | ) |
| Federal Home Loan Bank (FHLB) stock  dividends received                                      |       | (90                  | )          | (41 | ) |
| Gain on sale of loans                                                                        |       | (1,101               | )          | (1,999 | ) |
| Loss on disposal of other real estate owned                                                  |       | 125                  |       | 66 |   |
| Write-down of value of other real estate  owned                                              |       | 702                  |       | 61 |   |
| (Increase) decrease in other assets                                                          |       | (1,552               | )          | 3,038 |   |
| Decrease in other liabilities                                                                |       | (185                 | )          | (974 | ) |
| Tax benefit recognized for exercise of  stock options                                        |       | (497                 | )          | 53 |   |
| Release of Employee Stock Ownership Plan  (ESOP) shares                                      |       | 877                  |       | 768 |   |
| **Net cash provided by operating activities  before originations and gross sales of loans**  |       | 7,447                |       | 9,365 |   |
| Gross sales of loans held for sale                                                           |       | 83,638               |       | 140,034 |   |
| Origination of loans held for sale                                                           |       | (86,393              | )          | (140,396 | ) |
| **Net cash provided by operating activities**                                                |       | 4,692                |       | 9,003 |   |
| Cash Flows From Investing Activities                                                         |       |                 |       |   |   |
| Proceeds from maturities and paydowns of  investment securities, available for sale          |       | 4,355                |       | 30,885 |   |
| Proceeds from maturities and paydowns of  investment securities, held to maturity            |       | 18,244               |       | 133 |   |
| Proceeds from maturities and paydowns of  investment securities, other                       |       | 325                  |       | — |   |
| Proceeds from sale of investment  securities, available for sale                             |       | —               |       | 28,389 |   |
| Purchase of investment securities available  for sale                                        |       | —               |       | (2,804 | ) |
| Purchase of investment securities held to  maturity                                          |       | —               |       | — |   |
| Purchase of investment securities other                                                      |       | (678                 | )          | — |   |
| Proceeds from sale of other real estate  owned                                               |       | 3,432                |       | 2,551 |   |
| Loans funded, net of repayments                                                              |       | (102,127             | )          | (44,063 | ) |
| Purchases of premises and equipment                                                          |       | (1,038               | )          | (6,083 | ) |
| Proceeds from sale of premises and  equipment                                                |       | 100                  |       | — |   |
| **Net cash provided by (used in) investing  activities**                                     |       | (77,387              | )          | 9,008 |   |
| Cash Flows From Financing Activities                                                         |       |                 |       |   |   |
| Net increase in demand deposits, NOW  accounts and savings accounts                          |       | 9,831                |       | 29,978 |   |
| Net (decrease) increase in time deposits                                                     |       | 80,390               |       | (17,357 | ) |
| Proceeds from issuances of borrowings                                                        |       | 30,000               |       | 108,700 |   |
| Repayment of borrowings                                                                      |       | (38,210              | )          | (116,758 | ) |
| Repayment of ESOP debt                                                                       |       | (472                 | )          | (471 | ) |
| Proceeds from issuance of trust preferred  securities                                        |       | 10,310               |       | 6,186 |   |
| Purchase of treasury stock                                                                   |       | (4,422               | )          | (117 | ) |
| Issuance of common stock for stock option  plan                                              |       | 1,046                |       | 72 |   |
| Dividend payments                                                                            |       | (2,049               | )          | (2,048 | ) |
| **Net cash provided by financing activities**                                                |       | 86,424               |       | 8,185 |   |
| **Net increase in cash and cash equivalents**                                                |       | 13,729               |       | 26,196 |   |
| Cash and cash equivalents:                                                                   |       |                 |       |   |   |
| Beginning of year                                                                            |       | 23,814               |       | 43,111 |   |
| End of period                                                                                |       | $                    | 37,543     |   | $ | 69,307 |   |
|                                                                                         |       |                 |       |   |   |
| Supplemental Disclosures of Cash Flow  Information                                           |       |                 |       |   |   |
| Cash payments for:                                                                           |       |                 |       |   |   |
| Interest                                                                                     |       | $                    | 10,907     |   | $ | 8,393 |   |
| Income taxes                                                                                 |       | 3,247                |       | 1,024 |   |
| Non-cash investing and financing  activities:                                                |       |                 |       |   |   |
| Transfers from loans to other real estate  owned                                             |       | 475                  |       | 1,124 |   |
| Dividends declared, not yet paid                                                             |       | 2,012                |       | 2,049 |   |
| Change in unrealized gain on investment  securities, net of taxes                            |       | (51                  | )          | (330 | ) |

 

The accompanying notes are an integral partof these unaudited consolidated financial statements.

 

4

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**TRINITY CAPITAL CORPORATION &SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 1. Basis of Presentation**

 

The accompanying unaudited consolidated financial statements includethe consolidated balances and results of operations of Trinity CapitalCorporation (“Trinity” or the “Company”) and its wholly owned subsidiaries: LosAlamos National Bank (the “Bank”) and Title Guaranty & Insurance Company (“TitleGuaranty”), collectively referred to as the “Company.”  Trinity Capital Trust I (“Trust I”),Trinity Capital Trust II (“Trust II”), Trinity Capital Trust III (“TrustIII”), and Trinity Capital Trust IV (“Trust IV”), collectively referred to asthe “Trusts”, which are also wholly owned subsidiaries of Trinity, are notconsolidated in these financial statements. The business activities of the Company consist solely of the operationsof its wholly owned subsidiaries.  Allsignificant intercompany balances and transactions have been eliminated inconsolidation.  In the opinion ofmanagement, all adjustments (consisting only of normal recurring adjustments)necessary for a fair presentation of the financial position, results ofoperations and cash flows for the interim periods have been made.  The results of operations for the three and sixmonths ended June 30, 2005 are not necessarily indicative of the results to beexpected for the entire fiscal year.

 

The unaudited interim consolidated financial statements have beenprepared in conformity with accounting principles generally accepted in theUnited States of America and industry practice. Certain information in footnote disclosure normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America and industry practice hasbeen condensed or omitted pursuant to rules and regulations of the Securitiesand Exchange Commission.  These financialstatements should be read in conjunction with the consolidated financialstatements and notes thereto included in the Company’s December 31, 2004audited financial statements filed on Form 10-K.

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions which affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesas of the date of the financial statements, as well as the reported amounts ofincome and expenses during the reported periods.  Actual results could differ from thoseestimates.

 

**Note2.  Comprehensive Income**

 

Comprehensive income includes net income, as well as the change in netunrealized gain on investment securities available for sale, net of tax.  Comprehensive income was $2.5 million and $3.0million for the three month periods ended June 30, 2005 and 2004, respectively,and $4.9 million and $5.5 million for the six month periods ended June 30, 2005and 2004, respectively.

 

**Note3.  Earnings Per Share Data**

 

The following table sets forth the computation of basic and dilutedearnings per share for the periods indicated:

 
| ** **                                                                         | ** ** | **Three Months Ended June 30,**                                | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                                       | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(Unaudited; in thousands, except share and per share data)** | ** ** |
| Net income                                                                         |       | $                                                              | 2,441      |                          | $          | 3,359 |   | $ | 4,809 |   | $ | 5,809 |   |
| Weighted average common shares issued                                              |       | 6,856,800                                                      |       | 6,856,800                     |       | 6,856,800 |   | 6,856,800 |   |
| LESS: Weighted average treasury stock  shares                                      |       | (174,337                                                       | )          | (29,016                       | )          | (136,995 | ) | (29,072 | ) |
| LESS: Weighted average unearned Employee  Stock Ownership Plan (ESOP) stock shares |       | (73,346                                                        | )          | (99,748                       | )          | (75,968 | ) | (102,509 | ) |
| Weighted average common shares outstanding,  net                                   |       | 6,609,117                                                      |       | 6,728,036                     |       | 6,643,837 |   | 6,725,219 |   |
| Basic earnings per common share                                                    |       | $                                                              | 0.37       |                          | $          | 0.50 |   | $ | 0.72 |   | $ | 0.86 |   |
| Weighted average dilutive shares from stock  option plan                           |       | 95,653                                                         |       | 106,630                       |       | 97,257 |   | 112,206 |   |
| Weighted average common shares outstanding  including dilutive shares              |       | 6,704,770                                                      |       | 6,834,666                     |       | 6,741,094 |   | 6,837,425 |   |
| Diluted earnings per common share                                                  |       | $                                                              | 0.36       |                          | $          | 0.49 |   | $ | 0.71 |   | $ | 0.85 |   |

 

5

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**Note 4.  Recent AccountingPronouncements and Regulatory Developments**

 

In September 2004, theFinancial Accounting Standards Board (FASB) issued FASB Staff Position (FSP)Emerging Issues Task Force (EITF) Issue No. 03-1-1 delaying the effective dateof paragraphs 10-20 of EITF 03-1, *TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments.*  On June 30,2005, the FASB decided not to provide additional guidance on the meaning ofother-than-temporary impairment, but directed its staff to issue proposed FSP(FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Applicationto Certain Investments”).  This FSP will replace the guidance set forth inparagraphs 10-18 of Issue 03-1 with references to existing other-than-temporaryimpairment guidance and clarify that an investor should recognize an impairmentloss no later than when the impairment is deemed other-than-temporary, even ifa decision to sell has not been made. FSP FAS 115-1 will be effective for other-than-temporary impairmentanalysis conducted in periods beginning after September 15, 2005. Management believes that this guidance will not have a material impact onthe Company

 

In December 2004, the FASB issued SFAS No. 123R,*Share-BasedPayment*, which is an Amendment of FASB Statement Nos. 123 and95.  SFAS No. 123R changes, among otherthings, the manner in which share-based compensation, such as stock options,will be accounted for by both public and non-public companies.  For public companies, the cost of employeeservices received in exchange for equity instruments including options andrestricted stock awards generally will be measured at fair value at the grantdate.  The grant date fair value will beestimated using option-pricing models adjusted for the unique characteristicsof those options and instruments, unless observable market prices for the sameor similar options are available.  Thecost will be recognized over the requisite service period, often the vestingperiod.

 

The changes in accounting will replace existing requirements under SFASNo. 123, *Accounting for Stock-Based Compensation*,and will eliminate the ability to account for share-based compensationtransactions using APB Opinion No. 25, *Accounting for StockIssued to Employees*, which does not require companies to expenseoptions if the exercise price is equal to the trading price at the date ofgrant.  The accounting for similartransactions involving parties other than employees or the accounting foremployee stock ownership plans that are subject to AICPA Statement of Position93-6, *Employers’ Accounting for Employee Stock OwnershipPlans*, would remain unchanged. See Note 9 below for the Company’s current application of SFAS No. 123.

 

On April 14, 2005, the Securities and Exchange Commission (SEC)announced the adoption of a new rule that amends the compliance dates for SFASNo. 123R.  Under SFAS No. 123R, theCompany would have been required to implement the standard as of the beginningof the first interim period that begins after June 15, 2005.  The SEC’s new rule allows companies toimplement SFAS No. 123R at the beginning of their next fiscal year (beginningJanuary 1, 2006, in the case of the Company), instead of the next reportingperiod that begins after June 15, 2005.  The SEC’s new rule does not change theaccounting required by SFAS No. 123R; it changes only the dates for compliancewith the standard.

 

In May 2005, the FASB issuedSFAS No. 154, *Accounting Changes and Error Corrections*,which provides guidance on the accounting for and reporting of accountingchanges and error corrections.  Itestablishes, unless impracticable, retrospective application as the requiredmethod for reporting a change in accounting principle in the absence ofexplicit transition requirements specific to the newly adopted accountprinciple.  The reporting of a correctionof an error by restating previously issued financial statements is alsoaddressed by this statement.  SFAS No.154 is effective for accounting changes and corrections of errors made infiscal years beginning after December 15, 2005.

 

**Note 5.  Short Term Borrowings**

 

The Company had no FederalHome Loan Bank advances with maturities of less than one year as of June 30,2005.  As of December 31, 2004, theCompany had Federal Home Loan Bank advances with maturities of less than oneyear of $34.4 million.

 

**Note 6. Long Term Borrowings**

 

The Company had Federal Home Loan Bank advances withmaturity dates greater than one year of $86.2 million and $60.0 million as of June30, 2005 and December 31, 2004, respectively. As of June 30, 2005, the advances have fixed interest rates ranging from3.22% to 6.34%.

 

6

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**Note 7. Junior Subordinated Debt Owed to Unconsolidated Trusts**

 

The following table presents details on the junior subordinated debt owed to unconsolidated trusts as of June 30, 2005:

 
| ** **                                                  | ** ** | **Trust I**                | ** ** | **Trust II**      | ** ** | **Trust III**     | ** ** | **Trust IV**      | ** ** |
|-------------------------------------------------------------|------------|----------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                  | ** ** | **(Dollars in thousands)** | ** ** |
| Date of issue                                               |       | March 23, 2000             |       | November 28, 2001 |       | May 11, 2004      |       | June 29, 2005     |       |
| Amount of trust preferred securities issued                 |       | $10,000                    |       | $6,000            |       | $6,000            |       | $10,000           |       |
| Rate on trust preferred securities                          |       | 10.875%                    |       | 9.95%             |       | 6.03% (variable)  |       | 6.88%             |       |
| Maturity                                                    |       | March 8, 2030              |       | December 8, 2031  |       | September 8, 2034 |       | November 23, 2035 |       |
| Date of first redemption                                    |       | March 8, 2010              |       | December 8, 2006  |       | September 8, 2009 |       | August 23, 2010   |       |
| Common equity securities issued                             |       | $310                       |       | $186              |       | $186              |       | $310              |       |
| Junior subordinated deferrable interest  debentures owed    |       | $10,310                    |       | $6,186            |       | $6,186            |       | $10,310           |       |
| Rate on junior subordinated deferrable  interest debentures |       | 10.875%                    |       | 9.95%             |       | 6.03% (variable)  |       | 6.88%             |       |

 

On the dates of issue indicated above, the Trusts, being Delaware statutory business trusts, issued trust preferred securities (the “trust preferred securities”) in the amount and at the rate indicated above.  These securities represent preferred beneficial interests in the assets of the Trusts.  The trust preferred securities will mature on the dates indicated, and are redeemable in whole or in part at the option of the Company at any time after the date of first redemption indicated above, with the approval of the Federal Reserve Board and in whole at any time upon the occurrence of certain events affecting their tax or regulatory capital treatment.  The Trusts also issued common equity securities to Trinity in the amounts indicated above.  The Trusts used the proceeds of the offering of the trust preferred securities to purchase junior subordinated deferrable interest debentures (the “debentures”) issued by the Company, which have terms substantially similar to the trust preferred securities.  The Company has the right to defer payments of interest on the debentures at any time or from time to time for a period of up to ten consecutive semi-annual periods with respect to each interest payment deferred.  Under the terms of the debentures, under certain circumstances of default or the Company has elected to defer interest on the debentures, the Company may not, with certain exceptions, declare or pay any dividends or distributions on its capital stock or purchase or acquire any of its capital stock.  The Company used the majority of the proceeds from the sale of the debentures to add to Tier 1 or Tier 2 capital in order to support its growth.

 

Trinity owns all of the outstanding common securities of the Trusts.  The Trusts are considered variable interest entities (VIEs) under *Financial Accounting Standards Board Interpretation (FIN) No. 46, “Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51”*, as revised.  Prior to FIN 46, VIEs were generally consolidated by an enterprise when the enterprise had a controlling financial interest through ownership of a majority of voting interest in the entity.  Under FIN 46, a VIE should be consolidated by its primary beneficiary.  The Company implemented FIN 46 during the fourth quarter of 2003.  Because Trinity is not the primary beneficiary of the Trusts, the financial statements of the Trusts are no longer included in the consolidated financial statements of the Company.  The Company’s prior financial statements have been reclassified to de-consolidate the Company’s investment in the Trusts.

 

Payments of distributions on the trust preferred securities and payments on redemption of the trust preferred securities are guaranteed by the Company on a limited basis.  The Company also entered into an agreement as to expenses and liabilities with the Trusts pursuant to which it agreed, on a subordinated basis, to pay any costs, expenses or liabilities of the Trusts other than those arising under the trust preferred securities.  The obligations of the Company under the junior subordinated debentures, the related indenture, the trust agreement establishing the Trusts, the guarantee and the agreement as to expenses and liabilities, in the aggregate, constitute a full and unconditional guarantee by the Company of the Trusts’ obligations under the trust preferred securities.

 

Issuance costs of $615 thousand related to the first three trust preferredsecurities issues were deferred and are being amortized over the period untilmandatory redemption of the securities in March 2030, December 2031 andSeptember 2034, respectively.  During thethree months ended June 30, 2005 and 2004, respectively, $5 thousand and $5thousand of these issuance costs were amortized.  During the six months ended June 30, 2005 and2004, respectively, $10 thousand and $9 thousand of these issuance costs wereamortized.  Unamortized issuance costswere $529 thousand and $539 thousand at June 30, 2005 and December 31, 2004,respectively.

 

Dividends accrued and unpaid to securities holders totaled $418 thousandand $425 thousand on June 30, 2005 and 2004, respectively.

 

7

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**Note 8. Commitments, Contingencies and Off-Balance Sheet Activities**

 

*Credit-related financial instruments:*  The Company is a party to credit-related commitmentswith off-balance-sheet risk in the normal course of business to meet thefinancing needs of its customers.  These credit-relatedcommitments include commitments to extend credit, standby letters of credit andcommercial letters of credit.  Such credit-relatedcommitments involve, to varying degrees, elements of credit and interest raterisk in excess of the amount recognized in the consolidated balance sheets.

 

The Company’s exposure to credit loss is represented by the contractualamount of these credit-related commitments. The Company follows the same credit policies in making credit-related commitmentsas it does for on-balance-sheet instruments.

 

At June 30, 2005 and December 31, 2004, the following credit-relatedcommitments were outstanding whose contract amounts represent credit risk:

 
| ** **                                 | ** ** | **Contract Amount** | ** ** |
|--------------------------------------------|------------|---------------------|------------|
| ** **                                 | ** ** | **June 30,  2005**  | ** ** | **December 31,  2004** | ** ** |
| ** **                                 | ** ** | **(In thousands)**  | ** ** |
| Unfunded commitments under lines of credit |       | $                   | 194,364    |   | $ | 168,794 |   |
| Commercial and standby letters of credit   |       | 35,064              |       | 33,319 |   |
|                                            |            |                     |            |  |  |  |  |

 

Commitments to extend credit are agreements to lend to a customer aslong as there is no violation of any condition established in thecontract.  Commitments generally havefixed expiration dates or other termination clauses and may require a paymentof a fee.  The commitments for equitylines of credit may expire without being drawn upon.  Therefore, the total commitment amounts donot necessarily represent future cash requirements.  The amount of collateral obtained, if it isdeemed necessary by the Company, is based on management’s credit evaluation ofthe customer.  Unfunded commitments undercommercial lines of credit, revolving credit lines and overdraft protectionagreements are commitments for possible future extensions of credit to existingcustomers.  Overdraft protectionagreements are uncollateralized, but most other unfunded commitments havecollateral.  These unfunded lines ofcredit usually do not contain a specified maturity date and may not necessarilybe drawn upon to the total extent to which the Company is committed.

 

Commercial and standby letters of credit are conditional credit-relatedcommitments issued by the Company to guarantee the performance of a customer toa third party.  Those letters of creditare primarily issued to support public and private borrowing arrangements.  Essentially all letters of credit issued haveexpiration dates within one year. The credit risk involved in issuing letters ofcredit is the same as that involved in extending loans to customers.  The Company generally holds collateralsupporting those credit-related commitments. In the event the customer does notperform in accordance with the terms of the agreement with the third party, theCompany would be required to fund the credit-related commitment.  The maximum potential amount of futurepayments the Company could be required to make is represented by the contractualamount shown in the summary above.  Ifthe credit-related commitment is funded, the Company would be entitled to seekrecovery from the customer.  At June 30,2005 and December 31, 2004, no amounts have been recorded as liabilitiesfor the Company’s potential obligations under these credit-related commitments.  The fair value of these credit-related commitmentsis approximately equal to the fees collected when granting these letters ofcredit.  These fees collected were $88thousand and $60 thousand as of June 30, 2005 and December 31, 2004,respectively, and are included in “other liabilities” on the Company’s balancesheet.

 

*Concentrations of credit risk:*  The majority of the loans, commitments toextend credit, and standby letters of credit have been granted to customers inLos Alamos and surrounding communities. Although the Company has a diversified loan portfolio, a substantialportion of its loans are made to businesses and individuals associated with, oremployed by, Los Alamos National Laboratory (“the Laboratory”).  The ability of such borrowers to honor theircontracts is predominately dependent upon the continued operation and fundingof the Laboratory.  Investments insecurities issued by states and political subdivisions involve governmental entitieswithin the State of New Mexico.  Thedistribution of types of commitments to extend credit approximates thedistribution of loans outstanding. Standby letters of credit were granted primarily to commercialborrowers.

 

*Contingencies:*  In the normal course of business, the Companyis involved in various legal proceedings. In the opinion of management, after consulting with counsel, probable liabilitiesresulting from such proceedings would not have a material adverse effect on theCompany’s consolidated financial statements.

 

8

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**Note 9.  Pro Forma Impact of Stock-Based CompensationPlans**

 

Asallowed under SFAS No. 123, *Accounting forStock-Based Compensation*, the Company measures stock-basedcompensation cost in accordance with the methods prescribed in AccountingPrinciples Board (APB) Opinion No. 25, *Accountingfor Stock Issued to Employees*.  As stock options are granted atfair value, there are no charges to earnings associated with stock options granted. Accordingly, no compensation cost has been recognized for grants made todate.  Had compensation cost been determined based on the fair valuemethod prescribed in FASB Statement No. 123, reported net income and earningsper common share would have been reduced to the pro forma amounts shown below(dollars in thousands, except earnings per share data): 

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended  June 30,**                    | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                                            | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                                    | ** ** | **(Unaudited; in thousands except per share data)** | ** ** |
| Net income as reported                                                                                                                        |       | $                                                   | 2,441      |                           | $          | 3,359 |   | $ | 4,809 |   | $ | 5,809 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | 28                                                  |       | 28                             |       | 57 |   | 57 |   |
| Pro forma net income                                                                                                                          |       | $                                                   | 2,413      |                           | $          | 3,331 |   | $ | 4,752 |   | $ | 5,752 |   |
|                                                                                                                                          |       |                                                |       |                           |       |   |   |   |   |
| Earnings per share:                                                                                                                           |       |                                                |       |                           |       |   |   |   |   |
| Basic – as reported                                                                                                                      |       | $                                                   | 0.37       |                           | $          | 0.50 |   | $ | 0.72 |   | $ | 0.86 |   |
| Basic – pro forma                                                                                                                        |       | $                                                   | 0.37       |                           | $          | 0.50 |   | $ | 0.72 |   | $ | 0.86 |   |
|                                                                                                                                          |       |                                                |       |                           |       |   |   |   |   |
| Diluted – as reported                                                                                                                    |       | $                                                   | 0.36       |                           | $          | 0.49 |   | $ | 0.71 |   | $ | 0.85 |   |
| Diluted – pro forma                                                                                                                      |       | $                                                   | 0.36       |                           | $          | 0.49 |   | $ | 0.70 |   | $ | 0.84 |   |

 

9

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**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

*This discussion is intended to focus oncertain financial information regarding the Company and the Bank and is writtento provide the reader with a more thorough understanding of its financialstatements. The following discussion and analysis of the Company’s financialposition and results of operations should be read in conjunction with theinformation set forth in Item 3, Quantitative and Qualitative Disclosuresabout Market Risk and the annual audited consolidated financial statementsfiled on Form 10-K.*

 

**Special Note Concerning Forward-Looking Statements**

 

This Form 10-Q contains, and future oral and written statements ofthe Company may contain, forward-looking statements, within the meaning of suchterm in the Private Securities Litigation Reform Act of 1995, with respect tothe financial condition, results of operations, plans, objectives, futureperformance and business of the Company. Forward-looking statements, which maybe based upon beliefs, expectations and assumptions of our management and oninformation currently available to management, are generally identifiable bythe use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,”“may,” “will,” “would,” “could,” “should” or other similar expressions.Additionally, all statements in this document, including forward-lookingstatements, speak only as of the date they are made, and we undertake noobligation to update any statement in light of new information or futureevents.

 

Our ability to predict results or the actual effect of future plans orstrategies is inherently uncertain. Factors which could have a material adverseeffect on our operations and future prospects include, but are not limited to,the following:

 

•                                          Thestrength of the United States economy in general and the strength of the localeconomies in which we conduct our operations which may be less favorable thanexpected and may result in, among other things, a deterioration in the creditquality and value of our assets.

 

•                                          Theeconomic impact of any future terrorist threats or attacks, and the response ofthe United States to any such threats and attacks.

 

•                                          Theeffects of, and changes in, federal, state and local laws, regulations andpolicies affecting banking, securities, insurance and monetary and financialmatters.

 

•                                          Theeffects of changes in interest rates (including the effects of changes in therate of prepayments of the Company’s assets) and the policies of the Board ofGovernors of the Federal Reserve System.

 

•                                          Ourability to compete with other financial institutions as effectively as wecurrently intend due to increases in competitive pressures in the financialservices sector.

 

•                                          Ourinability to obtain new customers and to retain existing customers.

 

•                                          Thetimely development and acceptance of products and services, including productsand services offered through alternative delivery channels such as theInternet.

 

•                                          Technologicalchanges implemented by us and by other parties, including third party vendors,which may be more difficult or more expensive than anticipated or which mayhave unforeseen consequences to us and its customers.

 

•                                          Ourability to develop and maintain secure and reliable electronic systems.

 

•                                          Ourability to retain key executives and employees and the difficulty that we mayexperience in replacing key executives and employees in an effective manner.

 

•                                          Consumerspending and saving habits which may change in a manner that affects ourbusiness adversely.

 

•                                          Businesscombinations and the integration of acquired businesses which may be moredifficult or expensive than expected.

 

•                                          Thecosts, effects and outcomes of existing or future litigation.

 

10

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•                                          Changesin accounting policies and practices, as may be adopted by state and federalregulatory agencies and the Financial Accounting Standards Board.

 

•                                          Ourability to manage the risks associated with the foregoing as well asanticipated.

 

•                                          Changesin the management and national policy regarding the primary employer in LosAlamos County, Los Alamos National Laboratory (the “Laboratory”), includingchanges in the level of funding.

 

These risks and uncertainties should be considered in evaluatingforward-looking statements and undue reliance should not be placed on suchstatements. Additional information concerning the Company and our business,including other factors that could materially affect our financial results,will be included in our filings with the Securities and Exchange Commission.

 

**Critical Accounting Policies**

 

***Allowance for LoanLosses:*** Management believes the allowance for loan losses accounting policy iscritical to the portrayal and understanding of our financial condition andresults of operations.  As such,selection and application of this “critical accounting policy” involvesjudgments, estimates, and uncertainties that are susceptible to change.  In the event that different assumptions orconditions were to prevail, and depending upon the severity of such changes,the possibility of materially different financial condition or results ofoperations is a reasonable likelihood.

 

The allowance for loan losses is maintained at an amount thatmanagement believes will be adequate to absorb probable losses on existingloans, based on an evaluation of the collectibility of loans and prior lossexperience.  This evaluation also takesinto consideration such factors as changes in the nature and volume of the loanportfolio, the value of underlying collateral, overall portfolio quality,review of specific problem loans and current economic conditions that mayaffect the borrower’s ability to pay. While management uses the best information available to make itsevaluation, future adjustments to the allowance may be necessary if there aresignificant changes in these factors.  Inaddition, as an integral part of their examination process regulatory agenciesperiodically review our allowance for loan losses and may require us to makeadditions to the allowance based on their evaluation of information availableat the time of their examinations.

 

We maintain our allowance for loan losses at a level that managementbelieves will be adequate to absorb probable losses on existing loans based onan evaluation of the collectibility of loans and prior loss experience.  Three methods are used to evaluate theadequacy of the allowance for loan losses: (1) historical loss experience,based on loss experience by quality classification in the previous twelvecalendar quarters; (2) specific identification, based upon management’sassessment of loans and the probability that a charge off will occur in theupcoming quarter; and (3) loan concentrations, based on current orexpected economic factors in the geographic and industry sectors wheremanagement believes we may eventually experience some loan losses.

 

***Mortgage Servicing Right (MSR) Assets:***  Servicing residential mortgage loans for third-party investors represents a significant business activity of the Bank.  As of June 30, 2005, mortgage loans serviced for others totaled $924.3 million.  The MSRs on these loans totaled $8.2 million as of June 30, 2005.  The expected and actual rates of mortgage loan prepayments are the most significant factors driving the value of MSRs.  Increases in mortgage loan prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced.  In determining the initial value of the MSRs, mortgage interest rates, which are used to determine prepayment rates and discount rates, are held constant over the estimated life of the portfolio.  Fair values of the MSRs are provided by an independent third-party broker of MSRs on a monthly basis.  The values given by the broker are based upon current market conditions and assumptions, which incorporate the expected life of the loans, estimated costs to service the loans, servicing fees to be received and other factors.  MSRs are carried at the lower of the initial capitalized amount, net of accumulated amortization, or fair value.

 

The fair value of the MSRs is driven primarily by the effect current mortgage interest rates have on the likelihood borrowers will prepay the underlying mortgages by refinancing at a lower rate.  Accordingly, higher interest rates decrease the likelihood of repayment, extending the life of the MSRs and increasing the value of these assets.  Lower interest rates increase the likelihood of repayment, contracting the life of the MSRs and decreasing the value of these assets.  This can have a significant impact on our income.  We can have no certainty on the direction and amount of interest rate changes looking forward, and therefore, we can have no certainty on the amount or direction of the change in valuation.

 

An analysis of changes in mortgage servicing rights follows:

 

11

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| ** **                                                    | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                    | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** |
| ** **                                                    | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                    | ** ** | **(In thousands)**     | ** ** |
| Balance, beginning of period                                  |       | $                      | 8,628      |                 | $          | 7,416 |   | $ | 8,371 |   | $ | 7,792 |   |
| Servicing rights originated and capitalized                   |       | 468                    |       | 765                  |       | 855 |   | 1,376 |   |
| Amortization                                                  |       | (685                   | )          | (683                 | )          | (1,380 | ) | (1,307 | ) |
| Valuation allowance due to changes in  prepayment assumptions |       | (249                   | )          | 1,780                |       | 316 |   | 1,417 |   |
|                                                          |       | $                      | 8,162      |                 | $          | 9,278 |   | $ | 8,162 |   | $ | 9,278 |   |

 

**Overview**

 

The Company’s earnings were substantiallyunchanged from the first quarter of 2005 to the second quarter of 2005. However,the Company’s net income decreased 27.3% from the second quarter of 2004 to thesecond quarter of 2005.  This decline wasmainly due to a decrease in the valuation allowance of mortgage servicingrights due to a decline in interest rates between the two periods.  The Company’s balance sheet growth continuedto be strong, with total assets growing 8.5% from December 31, 2004 to June 30,2005.  The Company also increased itsrisk-based capital by issuing an additional $10 million in trust preferred securitiesat the end of the second quarter, enabling us to continue to grow and remainwell-capitalized.

 

**Income Statement Analysis**

 

***Net Income-General.***  Net income for the three months ended June30, 2005 was $2.4 million, compared to $3.4 million for the same period of 2004.  Diluted earnings per share decreased by $0.13to $0.36 for the three months ended June 30, 2005 from $0.49 for the sameperiod of 2004.  This represented a decreasein earnings per share of 26.5%.  The decreasein net income was primarily the result of an increase in the valuation allowance of mortgage servicing rights of $2.0 milliondue to a decline in interest rates between the two periods.  The loss on the sale of other real estateowned increased $267 thousand and the provision for loan losses increased $225thousand between the two periods.  Thegain on sale of loans decreased $345 thousand, due to a decline in loanrefinance activity between the two periods. These items were partially offset by an increase in net interest incomeof $1.3 million The effect of these items, net of taxes, was a decline of $918 thousandin net income for the three months ended June 30, 2005 compared to the sameperiod in 2004.

 

Net income for the six months ended June 30, 2005 was $4.8 million,compared to $5.8 million for the same period of 2004.  Diluted earnings per share decreased by $0.14to $0.72 for the six months ended June 30, 2005 from $0.86 for the same periodof 2004.  This represented a decrease in dilutedearnings per share of 16.5%.  Thedecrease in net income was primarily the result of an increase in the valuation allowance of mortgageservicing rights of $1.1 million due to a decline in interest rates between thetwo periods. In addition, the gain on sale of loans decreased $898 thousandand the loss on the sale of other real estate owned increased $700 thousandbetween the two periods.  Due in a largepart to the opening of the new office in Santa Fe in August 2004, occupancyexpenses increased $525 thousand and salaries and employee benefits increased$313 thousand from the first six months of 2004 to the first six months of2005.  These items were partially offsetby an increase in net interest income of $2.2 million between the two periods.  The effect of these items, net of taxes, wasa decline in net income of $1.0 million for the first six months of 2005compared to the same period in 2004.

 

The profitability of the Company’s operations depends primarily on itsnet interest income, which is the difference between total interest earned oninterest earning assets and total interest paid on interest bearingliabilities. The Company’s net income is affected by its provision for loanlosses as well as other income and other expenses. The provision for loanlosses reflects the amount thought to be adequate to cover probable creditlosses in the loan portfolio. Non-interest income or other income consists ofmortgage loan servicing fees, loan and other fees, service charges on deposits,gain on sale of loans, gain on sale of securities and other operating income.Other expenses include salaries and employee benefits, occupancy expenses, dataprocessing expenses, marketing, amortization and valuation of mortgageservicing rights, supplies expense and other expenses.

 

The amount of net interest income is affected by changes in the volumeand mix of interest earning assets, the level of interest rates earned on thoseassets, the volume and mix of interest bearing liabilities, and the level ofinterest rates paid on those interest bearing liabilities. The provision forloan losses is dependent on changes in the loan portfolio and management’sassessment of the collectibility of the loan portfolio, as well as economic andmarket conditions. Other income and other expenses are impacted by growth ofoperations and growth in the number of accounts through both acquisitions andcore banking business growth. Growth in operations affects other expenses as aresult of additional employees, branch facilities and promotional marketingexpense. Growth in the number of accounts affects other income includingservice fees as well as other expenses such as computer services, supplies,postage, telecommunications and other miscellaneous expenses.

 

12

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***Net Interest Income.***  The following tables present, for the periodsindicated, the total dollar amount of interest income from average interestearning assets and the resultant yields, as well as the interest expense onaverage interest bearing liabilities, and the resultant costs, expressed bothin dollars and rates. Borrowings made by the Company’s Employee Stock OwnershipPlan (“ESOP”) to outside parties are not included in this analysis, as theinterest expense on this borrowing is born by the ESOP. Funding for the ESOP isrecognized as part of compensation expense:

 
| ** **                                                           | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                           | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| ** **                                                           | ** ** | **Average  Balance**            | ** ** | **Interest** | ** ** | **Yield/Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/Rate** | ** ** |
| ** **                                                           | ** ** | **(Dollars in thousands)**      | ** ** |
| **Interest Earning Assets:**                                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Loans(1)(2)                                                          |       | $                               | 971,070    |   | $ | 15,475 |   | 6.39 | % | $ | 787,775 |   | $ | 11,956 |   | 6.10 | % |
| Taxable investment securities                                        |       | 78,294                          |       | 574 |   | 2.94 |   | 100,984 |   | 709 |   | 2.82 |   |
| Investment securities exempt from federal  income taxes(3)           |       | 17,220                          |       | 265 |   | 6.17 |   | 21,397 |   | 264 |   | 4.96 |   |
| Federal funds sold and securities purchased  under resell agreements |       | 1,150                           |       | 4 |   | 1.40 |   | 40 |   | — |   | 1.02 |   |
| Other interest bearing deposits                                      |       | 10,779                          |       | 79 |   | 2.94 |   | 26,919 |   | 63 |   | 0.94 |   |
| Investment in unconsolidated trust  subsidiaries                     |       | 689                             |       | 15 |   | 8.73 |   | 600 |   | 14 |   | 9.38 |   |
| Total interest earning assets                                        |       | 1,079,202                       |       | 16,412 |   | 6.10 |   | 937,715 |   | 13,006 |   | 5.58 |   |
| Non-interest earning assets                                          |       | 63,816                          |       |   |   |   |   | 69,243 |   |   |   |   |   |
| Total assets                                                         |       | $                               | 1,143,018  |   |   |   |   |   | $ | 1,006,958 |   |   |   |   |   |
|                                                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| **Interest Bearing Liabilities:**                                    |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| NOW and money market deposit                                         |       | $                               | 82,398     |   | $ | 196 |   | 0.95 | % | $ | 102,611 |   | $ | 261 |   | 1.02 | % |
| Savings deposit                                                      |       | 374,504                         |       | 1,445 |   | 1.55 |   | 344,828 |   | 803 |   | 0.94 |   |
| Time deposits                                                        |       | 404,402                         |       | 3,120 |   | 3.09 |   | 327,537 |   | 1,898 |   | 2.33 |   |
| Short-term borrowings                                                |       | 2,508                           |       | 21 |   | 3.36 |   | 5,342 |   | 28 |   | 2.11 |   |
| Long-term borrowings                                                 |       | 84,466                          |       | 826 |   | 3.92 |   | 64,428 |   | 591 |   | 3.69 |   |
| Junior subordinated debt owed to  unconsolidated trusts              |       | 22,909                          |       | 536 |   | 9.38 |   | 19,963 |   | 472 |   | 9.51 |   |
| Total interest bearing liabilities                                   |       | 971,187                         |       | 6,144 |   | 2.54 |   | 864,709 |   | 4,053 |   | 1.89 |   |
| Demand deposits—non-interest bearing                            |       | 28,107                          |       |   |   |   |   | 46,159 |   |   |   |   |   |
| Other non-interest bearing liabilities                               |       | 70,483                          |       |   |   |   |   | 27,535 |   |   |   |   |   |
| Stockholders’ equity, including stock owned  by ESOP            |       | 73,241                          |       |   |   |   |   | 68,555 |   |   |   |   |   |
| Total liabilities and stockholders equity                            |       | $                               | 1,143,018  |   |   |   |   |   | $ | 1,006,958 |   |   |   |   |   |
|                                                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income/interest rate Spread(4)                          |       |                            |       | $ | 10,268 |   | 3.56 | % |   |   | $ | 8,953 |   | 3.69 | % |
|                                                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Net interest margin on a fully tax  equivalent basis(5)              |       |                            |       |   |   | 3.82 | % |   |   |   |   | 3.84 | % |
|                                                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Net interest margin(5)                                               |       |                            |       |   |   | 3.78 | % |   |   |   |   | 3.80 | % |

 

----

(1)                                  Includes non-accrualloans of $5.4 million and $3.2 million for the three months ended June 30, 2005and 2004, respectively.

 

(2)                                  Interest incomeincludes loan origination fees of $806 thousand and $801 thousand for the threemonths ended June 30, 2005 and 2004, respectively.

 

(3)                                  Non-taxableinvestment income is presented on a fully tax equivalent basis, adjusting forfederal and state exemption of interest income and certain other permanentincome tax differences.

 

(4)                                  Interest rate spreadrepresents the difference between the average yield on interest earning assetsand the average cost of interest bearing liabilities and is presented on afully tax equivalent basis.

 

(5)                                  Net interest marginrepresents net interest income as a percentage of average interest earningassets.

 

13

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For the second quarter of 2005, net interest income on a fully taxequivalent basis increased $1.3 million (14.7%) to $10.3 million from $9.0million for the second quarter of 2004. The increase in net interest income resulted from an increase ininterest income on a fully tax equivalent basis of $3.4 million (26.2%), whichwas partially offset by an increase in interest expense of $2.1 million (51.6%).  Interest income increased mainly due to an increasein average earning assets of $141.5 million (15.1%), which accounted for a increasein interest income on a fully tax equivalent basis of $2.6 million.  There was also an increase in rate on earningassets of 52 basis points, which accounted for an increase of $783 thousand ininterest income on a fully tax equivalent basis.  Interest expense increased mainly due to anincrease in the cost of interest-bearing liabilities of 65 basis points, whichaccounted for $1.3 million of the increase. In addition, total interest-bearing liabilities increased $103.5 million(12.0%), accounting for $774 thousand of the increase in interest expense.  The net interest margin expressed on a fullytax equivalent basis decreased 2 basis points to 3.82% for 2005 from 3.84% for2004.

 
| ** **                                                 | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                 | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| ** **                                                 | ** ** | **Average  Balance**          | ** ** | **Interest** | ** ** | **Yield/Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/Rate** | ** ** |
| ** **                                                 | ** ** | **(Dollars in thousands)**    | ** ** |
| **Interest Earning Assets:**                               |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| Loans(1)(2)                                                |       | $                             | 946,393    |   | $ | 29,697 |   | 6.33 | % | $ | 775,408 |   | $ | 23,894 |   | 6.20 | % |
| Taxable investment securities                              |       | 83,870                        |       | 1,230 |   | 2.96 |   | 119,161 |   | 1,682 |   | 2.84 |   |
| Investment securities exempt from federal  income taxes(3) |       | 17,254                        |       | 546 |   | 6.38 |   | 20,915 |   | 507 |   | 4.87 |   |
| Federal funds sold                                         |       | 931                           |       | 8 |   | 1.73 |   | 40 |   | — |   | 0.78 |   |
| Other interest bearing deposits                            |       | 7,218                         |       | 99 |   | 2.77 |   | 14,763 |   | 69 |   | 0.94 |   |
| Investment in unconsolidated trust  subsidiaries           |       | 685                           |       | 31 |   | 9.13 |   | 548 |   | 27 |   | 9.91 |   |
| Total interest earning assets                              |       | 1,056,351                     |       | 31,611 |   | 6.03 |   | 930,835 |   | 26,179 |   | 5.66 |   |
| Non-interest earning assets                                |       | 66,744                        |       |   |   |   |   | 73,952 |   |   |   |   |   |
| Total assets                                               |       | $                             | 1,123,095  |   |   |   |   |   | $ | 1,004,787 |   |   |   |   |   |
|                                                       |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| **Interest Bearing Liabilities:**                          |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                  |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| NOW and money market deposit                               |       | $                             | 103,341    |   | $ | 522 |   | 1.02 | % | $ | 154,248 |   | $ | 655 |   | 0.85 | % |
| Savings deposit                                            |       | 374,384                       |       | 2,490 |   | 1.34 |   | 286,180 |   | 1,351 |   | 0.95 |   |
| Time deposits                                              |       | 391,376                       |       | 5,730 |   | 2.95 |   | 331,039 |   | 3,924 |   | 2.38 |   |
| Short-term borrowings                                      |       | 9,251                         |       | 123 |   | 2.68 |   | 11,590 |   | 95 |   | 1.65 |   |
| Long-term borrowings                                       |       | 73,751                        |       | 1,403 |   | 3.84 |   | 65,387 |   | 1,198 |   | 3.68 |   |
| Junior subordinated debt owed to  unconsolidated trusts    |       | 22,796                        |       | 1,055 |   | 9.33 |   | 18,229 |   | 911 |   | 10.05 |   |
| Total interest bearing liabilities                         |       | 974,899                       |       | 11,323 |   | 2.34 |   | 866,673 |   | 8,134 |   | 1.89 |   |
| Demand deposits—non-interest bearing                  |       | 36,981                        |       |   |   |   |   | 52,070 |   |   |   |   |   |
| Other non-interest bearing liabilities                     |       | 38,404                        |       |   |   |   |   | 17,707 |   |   |   |   |   |
| Stockholders’ equity, including stock owned  by ESOP  |       | 72,811                        |       |   |   |   |   | 68,337 |   |   |   |   |   |
| Total liabilities and stockholders equity                  |       | $                             | 1,123,095  |   |   |   |   |   | $ | 1,004,787 |   |   |   |   |   |
|                                                       |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income/interest rate Spread(4)                |       |                          |       | $ | 20,288 |   | 3.69 | % |   |   | $ | 18,045 |   | 3.77 | % |
|                                                       |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| Net interest margin on a fully tax  equivalent basis(5)    |       |                          |       |   |   | 3.87 | % |   |   |   |   | 3.90 | % |
|                                                       |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| Net interest margin(5)                                     |       |                          |       |   |   | 3.84 | % |   |   |   |   | 3.86 | % |

 

----

(1)                                  Includes non-accrualloans of $5.4 million and $3.2 million for the six months ended June 30, 2005and 2004, respectively.

 

(2)                                  Interest incomeincludes loan origination fees of $1.5 million and $1.4 million for the sixmonths ended June 30, 2005 and 2004, respectively.

 

(3)                                  Non-taxableinvestment income is presented on a fully tax equivalent basis, adjusting forfederal and state exemption of interest income and certain other permanentincome tax differences.

 

(4)                                  Interest rate spreadrepresents the difference between the average yield on interest earning assetsand the average cost of interest bearing liabilities and is presented on afully tax equivalent basis.

 

(5)                                  Net interest marginrepresents net interest income as a percentage of average interest earningassets.

 

14

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For the six months ended June 30, 2005, net interest income on a fullytax equivalent basis increased $2.2 million (12.4%) to $20.3 million from $18.1million for the six months ended June 30, 2004. The increase in net interest income resulted from an increase in interestincome on a fully tax equivalent basis of $5.4 million (20.7%), which waspartially offset by an increase in interest expense of $3.2 million (39.2%).  The increase in interest income on a fullytax equivalent basis was mainly due to an increase in total interest earningassets of $125.5 million (13.5%), which accounted for $4.7 million of theincrease.  The yield on interest earningassets also increased 37 basis points, which increased interest income on afully tax equivalent basis by $725 thousand. The increase in interest expense was due to an increase in the yield oninterest bearing liabilities of 45 basis points, which accounted for anincrease in interest expense of $1.8 million. In addition, averageinterest-bearing liabilities increased a total of $108.2 million (12.5%), whichincreased interest expense by $1.4 million. The net interest margin expressed on a fully tax equivalent basis decreased3 basis points to 3.87% for 2005 from 3.90% for 2004.

 

***Volume, Mix and RateAnalysis of Net Interest Income.***  The following tables present the extent towhich changes in volume, changes in interest rates, and changes in the interestrates times the changes in volume of interest earning assets and interestbearing liabilities have affected our interest income and interest expenseduring the periods indicated. Information is provided on changes in eachcategory due to (i) changes attributable to changes in volume (change involume times the prior period interest rate), (ii) changes attributable tochanges in interest rate (changes in rate times the prior period volume) and(iii) changes attributable to changes in rate/volume (changes in interestrate times changes in volume).  Changes attributableto the combined impact of volume and rate have been allocated proportionally tothe changes due to volume and the changes due to rate:

 
| ** **                                                 | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                                 | ** ** | **2005 Compared to 2004**       | ** ** | **2005 Compared to 2004**     | ** ** |
| ** **                                                 | ** ** | **Change Due  to Volume**  | ** ** | **Change Due  to Rate**  | ** ** | **Total  Change** | ** ** | **Change Due  to Volume** | ** ** | **Change Due  to Rate** | ** ** | **Total  Change** | ** ** |
| ** **                                                 | ** ** | **(In thousands)**              | ** ** |
| **Interest Earning Assets:**                               |       |                            |       |                          |       |   |   |   |   |   |   |   |   |
| Loans                                                      |       | $                               | 2,898      |                          | $          | 621 |   | $ | 3,519 |   | $ | 5,358 |   | $ | 445 |   | $ | 5,803 |   |
| Taxable investment securities                              |       | (167                            | )          | 32                            |       | (135 | ) | (517 | ) | 65 |   | (452 | ) |
| Investment securities exempt from federal  income taxes(1) |       | (57                             | )          | 58                            |       | 1 |   | (99 | ) | 138 |   | 39 |   |
| Federal funds sold                                         |       | 4                               |       | —                        |       | 4 |   | 8 |   | — |   | 8 |   |
| Other interest bearing deposits                            |       | (56                             | )          | 72                            |       | 16 |   | (49 | ) | 79 |   | 30 |   |
| Investment in unconsolidated trust subsidiaries            |       | 1                               |       | —                        |       | 1 |   | 6 |   | (2 | ) | 4 |   |
| Total increase (decrease) in interest  income              |       | 2,623                           |       | 783                           |       | 3,406 |   | 4,707 |   | 725 |   | 5,432 |   |
| **Interest Bearing Liabilities:**                          |       |                            |       |                          |       |   |   |   |   |   |   |   |   |
| NOW and money market deposit accounts                      |       | (49                             | )          | (16                           | )          | (65 | ) | (242 | ) | 109 |   | (133 | ) |
| Savings deposits                                           |       | 74                              |       | 568                           |       | 642 |   | 489 |   | 650 |   | 1,139 |   |
| Time deposits                                              |       | 506                             |       | 716                           |       | 1,222 |   | 788 |   | 1,018 |   | 1,806 |   |
| Short-term borrowings                                      |       | (19                             | )          | 12                            |       | (7 | ) | (22 | ) | 50 |   | 28 |   |
| Long-term borrowings                                       |       | 193                             |       | 42                            |       | 235 |   | 158 |   | 47 |   | 205 |   |
| Junior subordinated debt owed to  unconsolidated trusts    |       | 69                              |       | (5                            | )          | 64 |   | 215 |   | (71 | ) | 144 |   |
| Total increase (decrease) in interest  expense             |       | 774                             |       | 1,317                         |       | 2,091 |   | 1,386 |   | 1,803 |   | 3,189 |   |
| Increase (decrease) in net interest income                 |       | $                               | 1,849      |                          | $          | (534 | ) | $ | 1,315 |   | $ | 3,321 |   | $ | (1,078 | ) | $ | 2,243 |   |

 

----

(1)                                  Non-taxable investment income is presented ona fully tax equivalent basis, adjusting for federal and state exemption ofinterest income and certain other permanent income tax differences.

 

15

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***Other Income.***  Changes in other income between the threemonths ended June 30, 2005 and 2004, and between the six months ended June 30,2005 and 2004, were as follows:

 
| ** **                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Net**  | ** ** | **Six Months Ended  June 30,** | ** ** | **Net**  | ** ** |
|------------------------------|------------|----------------------------------|------------|----------|------------|--------------------------------|------------|----------|------------|
| ** **                   | ** ** | **2005**                         | ** ** | **2004** | ** ** | **difference**                 | ** ** | **2005** | ** ** | **2004** | ** ** | **difference** | ** ** |
| ** **                   | ** ** | **(In thousands)**               | ** ** |
| Other income:                |       |                             |       |     |       |                           |       |     |       |   |   |   |   |
| Mortgage loan servicing fees |       | $                                | 659        |     | $          | 585                            |       | $        | 74         |   | $ | 1,261 |   | $ | 1,159 |   | $ | 102 |   |
| Loan and other fees          |       | 709                              |       | 682      |       | 27                             |       | 1,297    |       | 1,239 |   | 58 |   |
| Service charges on deposits  |       | 368                              |       | 339      |       | 29                             |       | 699      |       | 670 |   | 29 |   |
| Gain on sale of loans        |       | 638                              |       | 983      |       | (345                           | )          | 1,101    |       | 1,999 |   | (898 | ) |
| Gain on sale of securities   |       | —                           |       | —   |       | —                         |       | —   |       | 272 |   | (272 | ) |
| Other operating income       |       | 319                              |       | 261      |       | 58                             |       | 395      |       | 528 |   | (133 | ) |
|                         |       | $                                | 2,693      |     | $          | 2,850                          |       | $        | (157       | ) | $ | 4,753 |   | $ | 5,867 |   | $ | (1,114 | ) |

 

In the secondquarter of 2005, other income decreased by $157 thousand (5.5%) to $2.7 millionfrom $2.9 million in the second quarter of 2004.  Gain on sale of loans decreased $345 thousand(35.1%) due to a continued drop in mortgage loan refinancing activity.  Mortgage refinancing activity may continue todiminish during the remainder of 2005 as many mortgage holders have alreadytaken advantage of the low interest rates favorable for refinancing.  Mortgage loan servicing fees increased $74thousand (12.6%) due to the growth in average mortgage loans serviced by $27.2million.

 

In the first sixmonths of 2005, other income decreased by $1.1 million (19.0%) to $4.8 millionfrom $5.9 million in the first six months of 2004.  Gain on sale of loans decreased $898 thousand(44.9%) due to a continued drop in mortgage loan refinancing activity.  Gain on sale of securities dropped $272thousand (100.0%) due to the lack of security sales in 2005.

 

***Other Expenses.***  Changes in other expenses between the threemonths ended June 30, 2005 and 2004 and the six months ended June 30, 2005 and2004 were as follows:

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|------------|------------|----------------------|------------|------------|------------|
| ** **                                               | ** ** | **June 30,**           | ** ** | **Net**    | ** ** | **June 30,**         | ** ** | **Net**    | ** ** |
| ** **                                               | ** ** | **2005**               | ** ** | **2004**   | ** ** | **difference**       | ** ** | **2005**   | ** ** | **2004** | ** ** | **difference** | ** ** |
| ** **                                               | ** ** | **(In thousands)**     | ** ** |
| Other expenses:                                          |       |                   |       |       |       |                 |       |       |       |   |   |   |   |
| Salaries and employee benefits                           |       | $                      | 3,963      |       | $          | 3,855                |       | $          | 108        |   | $ | 8,021 |   | $ | 7,708 |   | $ | 313 |   |
| Occupancy                                                |       | 794                    |       | 574        |       | 220                  |       | 1,593      |       | 1,068 |   | 525 |   |
| Data processing                                          |       | 415                    |       | 499        |       | (84                  | )          | 905        |       | 934 |   | (29 | ) |
| Marketing                                                |       | 406                    |       | 324        |       | 82                   |       | 730        |       | 550 |   | 180 |   |
| Amortization and valuation of mortgage  servicing rights |       | 934                    |       | (1,097     | )          | 2,031                |       | 1,064      |       | (110 | ) | 1,174 |   |
| Supplies                                                 |       | 191                    |       | 209        |       | (18                  | )          | 400        |       | 381 |   | 19 |   |
| Loss on sale of other real estate owned                  |       | 308                    |       | 41         |       | 267                  |       | 827        |       | 127 |   | 700 |   |
| Postage                                                  |       | 140                    |       | 103        |       | 37                   |       | 310        |       | 273 |   | 37 |   |
| Other                                                    |       | 1,142                  |       | 942        |       | 200                  |       | 2,101      |       | 2,048 |   | 53 |   |
|                                                     |       | $                      | 8,293      |       | $          | 5,450                |       | $          | 2,843      |   | $ | 15,951 |   | $ | 12,979 |   | $ | 2,972 |   |

 

For the secondquarter of 2005, other expenses increased $2.8 million (52.2%) to $8.3 millionfrom $5.5 million in the second quarter of 2004.  This increase was primarily due to an increasein the mortgage servicing rights impairment and amortization of $2.0 million (185.1%),due to a decrease in the valuation of mortgage servicing rights that resultedfrom a lower interest rate environment. The loss on the sale of other real estate owned increased $267 thousandas well, due to the writedown of the value of certain properties.

 

16

----

 

For the six months ended June30, 2005, other expenses increased $3.0 million (22.9%) to $16.0 million from $13.0million in the first six months of 2004. This increase was primarily due to an increase in the mortgage servicingrights impairment and amortization of $1.2 million (1067.3%), due to a lowerinterest rate environment.  The loss onthe sale of other real estate owned increased $700 thousand between the twoperiods, due to the writedown of the values of certain properties.  Occupancy expense increased by $525 thousand(49.2%) mainly due to expenses associated with the new Santa Fe office.  The opening of this office also resulted inthe increase of salaries and employee benefits of $313 thousand (4.1%).

 

***Income Taxes.***  In the second quarter of 2005, income taxexpense decreased $977 thousand (42.6%) over the second quarter of 2004 to atotal of $1.3 million compared to $2.3 million. The effective tax rate decreased to 35.0% in the second quarter of 2005,compared to 40.6% in the second quarter of 2004.  This decrease was mainly attributable to thetax benefit from the exercise of stock options.

 

In the six months ended June 30, 2005, income tax expense decreased $994thousand (26.6%) over the six months ended June 30, 2004 to a total of $2.7million compared to $3.7 million.  Theeffective tax rate decreased to 36.3% in the first six months of 2005, comparedto 39.2% in the first six months of 2004. This decrease was mainly attributable to the tax benefit from theexercise of stock options.

 

***Balance Sheet—General.***  Total assets at June 30, 2005 were at $1.2billion, an increase of $91.3 million (8.5%) from December 31, 2004.  Net loans increased $100.3 million (11.3%)during 2005, which was partially offset by a decline in investments of $22.8million (20.1%).  During the same period,total liabilities increased $91.6 million (9.1%) to a total of $1.1 billion on June30, 2005, from $1.0 billion on December 31, 2004.  The increase in total liabilities wasprimarily due to an increase in total deposits of $90.2 million (10.2%).  Stockholders’ equity (including stock ownedby the Employee Stock Ownership Plan) decreased $249 thousand (0.3%) to $72.7million on June 30, 2005 compared to $73.0 million on December 31, 2004.

 

***InvestmentSecurities.*** The primary purposes of the investment portfolio are to provide a sourceof earnings for liquidity management purposes, to provide collateral to pledgeagainst public deposits and to control interest rate risk. In managing theportfolio, we seek to obtain the objectives of safety of principal, liquidity,diversification and maximized return on funds. For an additional discussionwith respect to these matters, see “Liquidity” and “Capital Resources” underItem 2 and “Asset Liability Management” under Item 3 below.

 

The following tables set forth the amortized cost and fair value of oursecurities by accounting classification category and by type of security asindicated:

 
| ** **                                                       | ** ** | **At June 30, 2005** | ** ** | **At December 31, 2004** | ** ** | **At June 30, 2004** | ** ** |
|------------------------------------------------------------------|------------|----------------------|------------|-------------------------------|------------|----------------------|------------|
| ** **                                                       | ** ** | **Amortized Cost**   | ** ** | **Fair Value**                | ** ** | **Amortized Cost**   | ** ** | **Fair Value** | ** ** | **Amortized Cost** | ** ** | **Fair Value** | ** ** |
| ** **                                                       | ** ** | **(In thousands)**   | ** ** |
| Securities Available for Sale:                                   |       |                 |       |                          |       |                 |       |   |   |   |   |   |   |
| U.S. Government agencies                                         |       | $37,668              |       | $37,283                       |       | $42,218              |       | $41,907 |   | $36,797 |   | $36,497 |   |
| States and political subdivisions                                |       | 2,186                |       | 2,161                         |       | 2,210                |       | 2,191 |   | 1,132 |   | 1,113 |   |
| Equity securities                                                |       | 1                    |       | 6                             |       | 1                    |       | 7 |   | 1 |   | 7 |   |
| Total securities available for sale                              |       | $39,855              |       | $39,450                       |       | $44,429              |       | $44,105 |   | $37,930 |   | $37,617 |   |
|                                                             |       |                 |       |                          |       |                 |       |   |   |   |   |   |   |
| Securities Held to Maturity:                                     |       |                 |       |                          |       |                 |       |   |   |   |   |   |   |
| U.S. Government agencies                                         |       | $28,184              |       | $28,149                       |       | $46,547              |       | $46,705 |   | $52,897 |   | $53,395 |   |
| States and political subdivisions                                |       | 14,914               |       | 14,931                        |       | 15,111               |       | 15,178 |   | 20,333 |   | 20,410 |   |
| Total securities held to maturity                                |       | $43,098              |       | $43,080                       |       | $61,658              |       | $61,883 |   | $73,230 |   | $73,805 |   |
|                                                             |       |                 |       |                          |       |                 |       |   |   |   |   |   |   |
| Other securities:                                                |       |                 |       |                          |       |                 |       |   |   |   |   |   |   |
| Non-marketable equity securities (including  FRB and FHLB stock) |       | $6,931               |       | $6,931                        |       | $6,798               |       | $6,798 |   | $6,075 |   | $6,075 |   |
| Investment in unconsolidated trusts                              |       | 992                  |       | 992                           |       | 682                  |       | 682 |   | 682 |   | 682 |   |
| Total other securities                                           |       | $7,923               |       | $7,923                        |       | $7,480               |       | $7,480 |   | $6,757 |   | $6,757 |   |

 

17

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***Loan Portfolio.***  The following tables set forth thecomposition of the loan portfolio:

 
| ** **                | ** ** | **At June 30, 2005**       | ** ** | **At December 31, 2004** | ** ** | **At June 30, 2004** | ** ** |
|---------------------------|------------|----------------------------|------------|--------------------------|------------|----------------------|------------|
| ** **                | ** ** | **Amount**                 | ** ** | **Percent**              | ** ** | **Amount**           | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                | ** ** | **(Dollars in thousands)** | ** ** |
| Commercial                |       | $                          | 95,997     |                     | 9.62       | %                    | $          | 92,736 |   | 10.35 | % | $ | 77,473 |   | 9.87 | % |
| Commercial real estate    |       | 397,635                    |       | 39.84                    |       | 346,454              |       | 38.65 |   | 307,608 |   | 39.18 |   |
| Residential real estate   |       | 302,169                    |       | 30.28                    |       | 282,380              |       | 31.50 |   | 235,596 |   | 30.01 |   |
| Construction real estate  |       | 147,694                    |       | 14.80                    |       | 121,769              |       | 13.59 |   | 114,317 |   | 14.56 |   |
| Installment and other     |       | 54,543                     |       | 5.46                     |       | 52,984               |       | 5.91 |   | 50,052 |   | 6.38 |   |
| Total loans               |       | 998,038                    |       | 100.00                   |       | 896,323              |       | 100.00 |   | 785,046 |   | 100.00 |   |
| Unearned income           |       | (2,418                     | )          |                     |       | (2,002               | )          |   |   | (1,863 | ) |   |   |
| Gross loans               |       | 995,620                    |       |                     |       | 894,321              |       |   |   | 783,183 |   |   |   |
| Allowance for loan losses |       | (9,364                     | )          |                     |       | (8,367               | )          |   |   | (8,289 | ) |   |   |
| Net loans                 |       | $                          | 986,256    |                     |       |                 | $          | 885,954 |   |   |   | $ | 774,894 |   |   |   |

 

Total loans increased $213.0 million (27.1%) to $998.0 million at June30, 2005 from $785.0 million at June 30, 2004. The increase was dueprimarily to growth in the Company’s commercial, commercial real estate andresidential real estate loan portfolios as the percentage levels of thecategories of loans within the portfolio remained relatively constant.

 

***Asset Quality.***  The following table sets forth the amounts ofnon-performing loans and non-performing assets at the dates indicated:

 
| ** **                                                    | ** ** | **At June  30, 2005**      | ** ** | **At  December  31, 2004** | ** ** | **At June  30, 2004** | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **(Dollars in Thousands)** | ** ** |
| Non-accruing loans                                            |       | $                          | 12,347     |                       | $          | 5,714                 |       | $ | 3,448 |   |
| Loans 90 days or more past due, still  accruing interest |       | —                     |       | 8                          |       | 160                   |       |
| Total non-performing loans                                    |       | $                          | 12,347     |                       | $          | 5,722                 |       | $ | 3,608 |   |
| Other real estate owned                                       |       | 2,654                      |       | 6,438                      |       | 5,829                 |       |
| Other repossessed assets                                      |       | 24                         |       | 64                         |       | 39                    |       |
| Total non-performing assets                                   |       | $                          | 15,025     |                       | $          | 12,224                |       | $ | 9,476 |   |
|                                                          |       |                       |       |                       |       |                  |       |
| Total non-performing loans to total loans                     |       | 1.24                       | %          | 0.64                       | %          | 0.46                  | %          |
| Allowance for loan losses to non-performing  loans            |       | 75.84                      | %          | 146.23                     | %          | 229.74                | %          |
| Total non-performing assets to total assets                   |       | 1.28                       | %          | 1.13                       | %          | 0.93                  | %          |

 

At June 30, 2005, total non-performing assets increased $5.5 million (58.6%)to $15.0 million from $9.5 million at June 30, 2004 due to increases in non-accruingloans of $8.9 million (258.1%), which was partially offset by a decrease inother real estate owned of $3.2 million (54.5%).  The increase in non-accrual loans was duemainly to $7.4 million in commercial loans to one borrower being placed onnon-accrual status in June 2005.  Thisloan is secured by $6.5 million in construction equipment and accountsreceivable.  Management has allocated$916 thousand of the allowance for loan losses for these loans in the eventthat the customer will not be able to repay. The decrease in other real estate owned was primarily due to the sale of$3.4 million in residential real estate and residential construction propertyin 2005.

 

At June 30, 2005, total non-performing assets increased $2.8 million (22.9%)to $15.0 million from $12.2 million at December 31, 2004 primarily due to increasesin non-accruing loans of $6.6 million, which was partially offset by a decreasein other real estate owned of $3.8 million. The increase in non-accrual loans was due mainly to $7.4 million incommercial loans to one borrower being placed on non-accrual status in June2005.  This loan is secured by $6.5million in construction equipment and accounts receivable.  Management has allocated $916 thousand of theallowance for loan losses for these loans in the event that the customer willnot be able to repay.  The decrease in otherreal estate owned was primarily due to the sale of $3.4 million in residentialreal estate and residential construction property in 2005.

 

*Allowance for Loan Losses.*  Management believes the allowance for loanlosses accounting policy is critical to the portrayal and understanding of theCompany’s financial condition and results of operations. As such, selection andapplication of this “critical accounting policy” involves judgments, estimates,and uncertainties that are susceptible to change. In the event that differentassumptions or conditions were to prevail, and depending upon the severity ofsuch changes, the possibility of materially different financial condition orresults of operations is a reasonable likelihood.

 

18

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The allowance for loan losses is maintained at an amount thatmanagement believes will be adequate to absorb probable losses on existingloans, based on an evaluation of the collectibility of loans and prior lossexperience. This evaluation also takes into consideration such factors aschanges in the nature and volume of the loan portfolio, the value of underlyingcollateral, overall portfolio quality, review of specific problem loans andcurrent economic conditions that may affect the borrower’s ability to pay.While management uses the best information available to make its evaluation,future adjustments to the allowance may be necessary if there are significantchanges in economic conditions. In addition, as an integral part of theirexamination process regulatory agencies periodically review the Company’sallowance for loan losses and may require the Company to make additions to theallowance based on their evaluation of information available at the time oftheir examinations.

 

The following table presents an analysis of the allowance for loanlosses for the periods presented:

 
| ** **                                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                     | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                     | ** ** | **(Dollars in thousands)**       | ** ** |
| Balance at beginning of period                 |       | $                                | 8,689      |                           | $          | 7,734 |   | $ | 8,367 |   | $ | 7,368 |   |
| Provision for loan losses                      |       | 825                              |       | 600                            |       | 1,350 |   | 1,200 |   |
| Total charge-offs                              |       | (191                             | )          | (57                            | )          | (430 | ) | (295 | ) |
| Total recoveries                               |       | 41                               |       | 12                             |       | 77 |   | 16 |   |
| Net charge-offs                                |       | (150                             | )          | (45                            | )          | (353 | ) | (279 | ) |
| Balance at end of period                       |       | $                                | 9,364      |                           | $          | 8,289 |   | $ | 9,364 |   | $ | 8,289 |   |
|                                           |       |                             |       |                           |       |   |   |   |   |
| Gross loans at end of period                   |       | $                                | 995,620    |                           | $          | 783,183 |   | $ | 995,620 |   | $ | 783,183 |   |
| Ratio of allowance to total loans              |       | 0.94                             | %          | 1.06                           | %          | 0.94 | % | 1.06 | % |
| Ratio of net charge-offs to average loans  (1) |       | 0.06                             | %          | 0.02                           | %          | 0.08 | % | 0.07 | % |

 

----

(1)                                  Net charge-offs areannualized for the purposes of this calculation.

 

Net charge-offs for the three months ended June 30, 2005 totaled $150 thousand,an increase of $105 thousand (233.3%) from $45 thousand from the three monthsended June 30, 2004.  The majority of thecharge-offs were commercial loans.  Theprovision for loan losses increased by $225 thousand (37.5%) for the threemonths ended June 30, 2005, due to management’s analysis of currentnon-performing loans.

 

Net charge-offs for the six months ended June 30, 2005 totaled $353thousand, an increase of $74 thousand (26.5%) from $279 thousand from the sixmonths ended June 30, 2004.  The majorityof the charge-offs were commercial and installment.  The provision for loan losses increased by$150 thousand (12.5%) for the six months ended June 30, 2005, due to management’sanalysis of current non-performing loans.

 

The following table sets forth the allocation of the allowance for loanlosses for the periods presented and the percentage of loans in each categoryto total loans. An allocation for a loan classification is only for internalanalysis of the adequacy of the allowance and is not an indication of expectedor anticipated losses:

 
| ** **                             | ** ** | **At June 30, 2005**       | ** ** | **At December 31, 2004** | ** ** | **At June 30, 2004** | ** ** |
|----------------------------------------|------------|----------------------------|------------|--------------------------|------------|----------------------|------------|
| ** **                             | ** ** | **Amount**                 | ** ** | **Percent**              | ** ** | **Amount**           | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                             | ** ** | **(Dollars in thousands)** | ** ** |
| Commercial                             |       | $                          | 2,624      |                     | 9.62       | %                    | $          | 3,502 |   | 10.35 | % | $ | 2,143 |   | 9.87 | % |
| Commercial and residential real estate |       | 3,996                      |       | 70.12                    |       | 2,511                |       | 70.15 |   | 2,861 |   | 69.19 |   |
| Construction real estate               |       | 1,909                      |       | 14.80                    |       | 981                  |       | 13.59 |   | 1,493 |   | 14.56 |   |
| Installment and other                  |       | 810                        |       | 5.46                     |       | 1,369                |       | 5.91 |   | 1,761 |   | 6.38 |   |
| Unallocated                            |       | 25                         |       | N/A                      |       | 4                    |       | N/A |   | 31 |   | N/A |   |
| Total                                  |       | $                          | 9,364      |                     | 100.00     | %                    | $          | 8,367 |   | 100.00 | % | $ | 8,289 |   | 100.00 | % |

 

----

N/A—notapplicable

 

19

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The portion of the allocation that was based upon historical lossexperience decreased by $803 thousand (21.6%) in 2005, from $3.7 million on December31, 2004 to $2.9 million on June 30, 2005. This was largely due to a decrease in the allocation for commercialloans which decreased by $1.6 million, which was partially offset by anincrease in the allocation for commercial real estate of $887 thousand.  These changes were due to a change in thelosses we actually experienced during the six months ended June 30, 2005.  Historical loss allocation was relativelyunchanged from June 30, 2004 to June 30, 2005, increasing $85 thousand (3.0%).  Concentration allocation increased by $912thousand (21.7%), from $4.2 million on December 31, 2005 to $5.1 million on June30, 2005.  This was primarily due to anincrease in the allocation for construction loans of $816 thousand.  This change was due to growth in the loanportfolio in this loan category, increasing our concentrations in the specificsectors identified in our analysis.  FromJune 30, 2004 to June 30, 2005, the concentration allocation increased $287 thousand(6.0%), due to loan growth between these two periods.  From December 31, 2004 to June 30, 2005, theallocation for specifically identified loans increased, from $446 thousand to $1.3million, an increase of $867 thousand (194.5%). From June 30, 2004 to June 30, 2005, the allocation for specificallyidentified loans increased $709 thousand (117.4%).

 

Management anticipatescontinued growth in the loan portfolio due to a strong local economy, astabilized Los Alamos National Laboratory budget of over $2 billion andcontinued new home construction and expansion in Santa Fe.  The volume of commercial real estate andconstruction loans is also anticipated to increase as the industry continues tostrengthen and the recovery in capital spending boosts production and profitsin 2005.  Although record mortgagefinancing peaked in 2003, the housing market for new construction and resalehomes is expected to remain strong, especially in the under $500 thousandmarket, which should remain constant. Residential real estate for property worth greater than $1.5 million isexpected to be as “soft” as during the last several years.

 

Additions to the allowance for loan losses, which are charged toearnings through the provision for loan losses, are determined based on avariety of factors, as indicated above. Although management believes the allowance for loan losses is sufficientto cover probable losses inherent in the loan portfolio, there can be noassurance that the allowance will prove sufficient to cover actual future loanlosses.

 

*Potential Problem Loans.*  The Company utilizes an internal assetclassification system as a means of reporting problem and potential problemassets.  At scheduled Board of Directorsmeetings every quarter, a list of total adversely classified assets ispresented, showing other real estate owned, other repossessed assets, and allloans listed as “Substandard,” “Doubtful” and “Loss.”  All non-accrual loans are classed either as “Substandard”or “Doubtful” and are thus included in total adversely classified assets.  A separate watch list of loans classified as “SpecialMention” is also presented.  An asset isclassified Substandard if it is inadequately protected by the current net worthand paying capacity of the obligor and/or of the collateral pledged, if any.Substandard assets include those characterized by the distinct possibility thatthe Company will sustain some loss if the deficiencies are not corrected.  Assets classified as Doubtful have all theweaknesses inherent in those classified Substandard with the addedcharacteristic that the weaknesses present make collection or liquidation infull, on the basis of currently existing facts, conditions and values, highlyquestionable and improbable.  Assetsclassified as Loss are those considered uncollectible and viewed asnon-bankable assets, worthy of charge-off. Assets that do not currently expose the Company to sufficient risk towarrant classification in one of the aforementioned categories, but possessweaknesses that may or may not be within the control of the customer are deemedto be Special Mention.

 

The Company’s determination as to the classification of its assets andthe amount of its valuation allowances is subject to review by the Bank’sprimary regulators, which can order the establishment of additional general orspecific loss allowances.  TheComptroller of the Currency, in conjunction with the other federal bankingagencies, has adopted an interagency policy statement on the allowance for loanlosses.  The policy statement providesguidance for financial institutions on both the responsibilities of managementfor the assessment and establishment of adequate allowances and guidance forbanking agency examiners to use in determining the adequacy of generalvaluation guidelines.  Generally, thepolicy statement recommends that (i) institutions have effective systemsand controls to identify, monitor and address asset quality problems;(ii) management has analyzed all significant factors that affect thecollectibility of the portfolio in a reasonable manner; and(iii) management has established acceptable allowance evaluation processesthat meet the objectives set forth in the policy statement.  Management believes it has established anadequate allowance for probable loan losses. The Company analyzes its process regularly, with modifications made ifneeded, and reports those results quarterly at Board of Directorsmeetings.  However, there can be no assurancethat regulators, in reviewing the Company’s loan portfolio, will not requestthe Company to materially increase its allowance for loan losses at a futuretime.  Although management believes thatadequate specific and general loan loss allowances have been established,actual losses are dependent upon future events and, as such, further additionsto the level of specific and general loan loss allowances may become necessary.

 

20

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The following table shows the amounts of adversely classified assetsand special mention loans as of the periods indicated:

 
| ** **                        | ** ** | **At June  30, 2005**      | ** ** | **At  December  31, 2004** | ** ** | **At June  30, 2004** | ** ** |
|-----------------------------------|------------|----------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **(Dollars in thousands)** | ** ** |
| Loans classified as:              |       |                       |       |                       |       |                  |       |
| Substandard                       |       | $                          | 22,492     |                       | $          | 15,810                |       | $ | 14,237 |   |
| Doubtful                          |       | 1,296                      |       | 201                        |       | 213                   |       |
| Total adversely classified loans  |       | 23,788                     |       | 16,011                     |       | 14,450                |       |
| Other real estate owned           |       | 2,654                      |       | 6,438                      |       | 5,829                 |       |
| Other repossessed assets          |       | 24                         |       | 64                         |       | 39                    |       |
| Total adversely classified assets |       | $                          | 26,466     |                       | $          | 22,513                |       | $ | 20,318 |   |
|                              |       |                       |       |                       |       |                  |       |
| Special mention loans             |       | $                          | 12,195     |                       | $          | 22,834                |       | $ | 20,769 |   |

 

Total adversely classifiedassets increased $6.1 million (30.3%) from June 30, 2004 to June 30, 2005.  The main reason for the increase was anincrease of $8.3 million in loans classified as substandard and an increase of$1.1 million in loans classified as doubtful, which was partially offset by adecrease in other real estate owned of $3.2 million.  The increase in loans classified assubstandard was due mainly to one large borrowing relationship from thecontractor loan pool being downgraded. The increase in loans classified as doubtful was mainly due to the samerelationship downgrade. The decrease in other real estate owned was primarilydue to the sale of $3.4 million in residential real estate and residentialconstruction property in 2005.  Specialmention loans decreased $8.6 million (41.3%) from June 30, 2004 to June 30, 2005,primarily due to several loans having been upgraded to pass and some loanshaving been downgraded further to substandard.

 

**Sources of Funds**

 

***Liquidity andSources of Capital***

 

The Company’s cash flows are comprised of three classifications: cashflows from operating activities, cash flows from investing activities and cashflows from financing activities. Net cash provided by operating activities was $4.7million and $9.0 million for the six months ended June 30, 2005 and 2004,respectively.  Net cash provided byoperating activities decreased $4.3 million in the first six months of 2005compared to the first six months of 2004 largely due to a decline in the gross salesof loans held for sale by $56.4 million over the first six months of 2004,which was partially offset by the origination of loans held for sale thatdecreased $54.0 million in the same period. Net cash (used in) provided by investing activities was $(77.4) millionand $9.0 million for the six months ended June 30, 2005 and 2004,respectively.  The $86.4 million decreasein cash provided by investing activities was largely due to the increase inloans funded net of repayments of $58.1 million, and the decrease of $28.4million in the proceeds from the sale of investment securities.  Net cash provided by financing activities was$86.4 million and $8.2 million for the six months ended June 30, 2005 and 2004,respectively.  The $78.2 million increasein cash provided by financing activities was mainly due to an increase in newdeposit growth of $77.6 million in the first six months of 2005 compared to thefirst six months of 2004.

 

The Company expects to have available cash to meet itsliquidity needs.  Liquidity management is monitored by the Asset/Liabilitycommittee of the Bank, which takes into account the marketability of assets,the sources and stability of funding and the level of unfundedcommitments.  In the event thatadditional short-term liquidity is needed, the Company has establishedrelationships with several large regional banks to provide short-termborrowings in the form of federal funds purchases.  The Company has borrowed, and managementbelieves that the Company could again borrow, up to $94.0 million for ashort time from these banks on a collective basis.  Additionally, the Bank is a member of theFederal Home Loan Bank (“FHLB”) and has the ability to borrow from theFHLB.  As a contingency plan forsignificant funding needs, the Asset/Liability committee may also consider thesale of investment securities, selling securities under agreement torepurchase, sale of certain loans and/or the temporary curtailment of lendingactivities.

 

At June 30, 2005, the Company’s total risk-basedcapital ratio was 11.70%, the Tier 1 capital to risk-weighted assets ratio was 9.94%,and the Tier 1 capital to average assets ratio was 8.47%.  The Bank was categorized as “well-capitalized”under Federal Deposit Insurance Corporation regulations at June 30, 2005 and December31, 2004.  At December 31, 2004, theCompany’s total risk-based capital ratio was 11.59%, the Tier 1 capital torisk-weighted assets ratio was 10.65%, and the Tier 1 capital to average assetsratio was 8.87%.

 

At June 30, 2005 and December 31, 2004, the Company’sbook value per common share was $10.97 and $10.84, respectively.

 

21

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**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

 

**Asset Liability Management**

 

The Company’s net interest income is subject to “interest rate risk” tothe extent that it can vary based on changes in the general level of interestrates. It is the Company’s policy to maintain an acceptable level of interestrate risk over a range of possible changes in interest rates while remainingresponsive to market demand for loan and deposit products.  The strategy employed by the Company tomanage its interest rate risk is to measure its risk using an asset/liabilitysimulation model and adjust the maturity of securities in its investmentportfolio to manage that risk.

 

Interest rate risk can also be measured by analyzing the extent towhich the repricing of assets and liabilities are mismatched to create aninterest sensitivity “gap”.  An asset orliability is said to be interest rate sensitive within a specific time periodif it will mature or reprice within that time period.  The interest rate sensitivity gap is definedas the difference between the amount of interest earning assets maturing orrepricing within a specific time period and the amount of interest bearingliabilities maturing or repricing within that same time period.  A gap is considered positive when the amountof interest rate sensitive assets exceeds the amount of interest rate sensitiveliabilities.  A gap is considerednegative when the amount of interest rate sensitive liabilities exceeds theamount of interest rate sensitive assets. During a period of rising interest rates, therefore, a negative gapwould tend to adversely affect net interest income.  Conversely, during a period of fallinginterest rates, a negative gap position would tend to result in an increase innet interest income.

 

The following table sets forth the amounts of interest earning assetsand interest bearing liabilities outstanding at June 30, 2005, which areanticipated by the Company, based upon certain assumptions, to reprice ormature in each of the future time periods shown. Except as stated below, theamount of assets and liabilities shown which reprice or mature during a particularperiod were determined based on the earlier of the term to repricing or theterm to repayment of the asset or liability. The table is intended to provide an approximation of the projectedrepricing of assets and liabilities at June 30, 2005 on the basis ofcontractual maturities and scheduled rate adjustments within a three-monthperiod and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to bereinvested and/or repriced as a result of contractual amortization and rateadjustments on adjustable-rate loans. Loan and investment securitiescontractual maturities and amortization reflect modest prepaymentassumptions.  While NOW, money market andsavings deposit accounts have adjustable rates, it is assumed that the interestrates on these accounts will not adjust immediately to changes in otherinterest rates.  Therefore, the table iscalculated assuming that these accounts will reprice based upon an historical analysisof rate changes of these particular accounts, with repricing assigned to theseaccounts from one to thirteen months.

 

22

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| ** **                                              | ** ** | **Time to Maturity or Repricing** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------|------------|
| **As of June 30, 2005:**                                | ** ** | **0-90 Days**                     | ** ** | **91-365 Days** | ** ** | **1-5 Years** | ** ** | **Over 5 Years** | ** ** | **Total** | ** ** |
| ** **                                              | ** ** | **(In thousands)**                | ** ** |
| **Interest Earning Assets:**                            |       |                              |       |   |   |   |   |   |   |   |   |
| Loans                                                   |       | $                                 | 475,828    |   | $ | 426,746 |   | $ | 64,146 |   | $ | 28,900 |   | $ | 995,620 |   |
| Loans held for sale                                     |       | 11,645                            |       | — |   | — |   | — |   | 11,645 |   |
| Investment securities                                   |       | 20,968                            |       | 35,270 |   | 26,187 |   | 7,054 |   | 89,479 |   |
| Securities purchased under agreements to  resell        |       | 577                               |       | — |   | — |   | — |   | 577 |   |
| Interest bearing deposits with banks                    |       | 6,127                             |       | — |   | — |   | — |   | 6,127 |   |
| Investment in unconsolidated trusts                     |       | 186                               |       | — |   | — |   | 806 |   | 992 |   |
| Total interest earning assets                           |       | $                                 | 515,331    |   | $ | 462,016 |   | $ | 90,333 |   | $ | 36,760 |   | $ | 1,104,440 |   |
|                                                    |       |                              |       |   |   |   |   |   |   |   |   |
| **Interest Bearing Liabilities:**                       |       |                              |       |   |   |   |   |   |   |   |   |
| NOW and money market deposit accounts                   |       | $                                 | 104,987    |   | $ | 112,937 |   | — |   | — |   | $ | 217,924 |   |
| Savings deposits                                        |       | 93,848                            |       | 156,414 |   | 7,604 |   | — |   | 257,866 |   |
| Time deposits                                           |       | 123,704                           |       | 201,775 |   | 75,986 |   | 18,257 |   | 419,722 |   |
| Short- and long-term borrowings                         |       | 1,936                             |       | 5,925 |   | 23,042 |   | 55,293 |   | 86,196 |   |
| Borrowings made by ESOP to outside parties              |       | 1,214                             |       | — |   | — |   | — |   | 1,214 |   |
| Junior subordinated debt owed to  unconsolidated trusts |       | 6,186                             |       | — |   | — |   | 26,806 |   | 32,992 |   |
| Total interest bearing liabilities                      |       | $                                 | 331,875    |   | $ | 477,051 |   | $ | 106,632 |   | $ | 100,356 |   | $ | 1,015,914 |   |
|                                                    |       |                              |       |   |   |   |   |   |   |   |   |
| Rate sensitive assets (RSA)                             |       | $                                 | 515,331    |   | $ | 977,347 |   | $ | 1,067,680 |   | $ | 1,104,440 |   | $ | 1,104,440 |   |
| Rate sensitive liabilities (RSL)                        |       | 331,875                           |       | 808,926 |   | 915,558 |   | 1,015,914 |   | 1,015,914 |   |
| Cumulative GAP (GAP=RSA-RSL)                            |       | 183,456                           |       | 168,421 |   | 152,122 |   | 88,526 |   | 88,526 |   |
| RSA/Total assets                                        |       | 43.98                             | %          | 83.41 | % | 91.12 | % | 94.26 | % | 94.26 | % |
| RSL/Total assets                                        |       | 28.32                             | %          | 69.04 | % | 78.14 | % | 86.70 | % | 86.70 | % |
| GAP/Total assets                                        |       | 15.66                             | %          | 14.37 | % | 12.98 | % | 7.56 | % | 7.56 | % |
| GAP/RSA                                                 |       | 35.60                             | %          | 17.23 | % | 14.25 | % | 8.02 | % | 8.02 | % |

 

Certain shortcomings are inherent in the method of analysis presentedin the foregoing table. For example, although certain assets and liabilitiesmay have similar maturities or periods to repricing, they may react indifferent degrees to changes in market interest rates. Also, the interest rateson certain types of assets and liabilities may fluctuate in advance of changesin market interest rates, while interest rates on other types of assets may lagbehind changes in market rates. Additionally, in the event of a change in interest rates, prepayment andearly withdrawal levels would likely deviate significantly from those assumedin calculating the table.  Therefore, theCompany does not rely solely on a gap analysis to manage its interest raterisk, but rather it uses what it believes to be the more reliable simulationmodel relating to changes in net interest income as set forth below.

 

Changes in net interest income between the periods below reflectchanges in the composition of interest earning assets and interest bearingliabilities, related interest rates, repricing frequencies, and the fixed orvariable characteristics of the interest earning assets and interest bearingliabilities.  Projections of income givenby the model are not actual predictions, but rather show our relative interestrate risk.  Actual interest income mayvary from model projections.  Based onsimulation modeling at June 30, 2005 and December 31, 2004, the Company’s netinterest income would change over a one-year time period due to changes ininterest rates as follows:

 

**Change in Net Interest Income Over One YearHorizon**

 

| **Changes in Levels of  Interest Rates** | ** **        | **At June 30, 2005**       | ** **            | **At December 31, 2004** | ** **        |
|------------------------------------------|-------------------|----------------------------|-----------------------|--------------------------|-------------------|
| ** **                               | **Dollar Change** | ** **                 | **Percentage Change** | ** **               | **Dollar Change** | ** ** | **Percentage Change** | ** ** |
| ** **                               | ** **        | **(Dollars in thousands)** | ** **            |
| + 2.00                                   | %                 | $                          | (3,459                | )                        | (7.80             | )% | $ | (5,183 | ) | (13.25 | )% |
| + 1.00                                   |              | (1,299                     | )                     | (2.93                    | )                 | (2,030 | ) | (5.19 | ) |
| (1.00                                    | )                 | (2,333                     | )                     | (5.26                    | )                 | 595 |   | 1.52 |   |
| (2.00                                    | )                 | (4,989                     | )                     | (11.25                   | )                 | 78 |   | 0.20 |   |
|                                          |                   |                            |                       |                          |                   |  |  |  |  |  |  |

 

Simulations used by the Company assume the following:

 

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1.                                       Changes ininterest rates are immediate.

 

2.                                       It is theCompany’s policy that interest rate exposure due to a 2.00% interest rate riseor fall be limited to 15.0% of the Company’s annual net interest income, asforecasted by the simulation model. As demonstrated by the table above, theCompany’s interest rate risk exposure was within this policy at June 30, 2005.

 

**Item4.  Controls and Procedures.**

 

                Evaluation of Disclosure Controls andProcedures: An evaluation ofour disclosure controls and procedures (as defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934 (the “Act”)) was carried out as of June 30,2005 under the supervision and with the participation of our Chief ExecutiveOfficer, Chief Financial Officer and several other members of our seniormanagement.  Our Chief Executive Officerand Chief Financial Officer concluded that, as of June 30, 2005, our disclosurecontrols and procedures were effective in ensuring that the information we arerequired to disclose in the reports we file or submit under the Act is (i)accumulated and communicated to our management (including the Chief ExecutiveOfficer and Chief Financial Officer) in a timely manner, and (ii) recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms.

 

                Changes in Internal Control OverFinancial Reporting:During the quarter ended June 30, 2005, no change occurred in our internalcontrol over financial reporting that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

We do not expect that ourdisclosure controls and procedures and internal control over financialreporting will prevent all error and all fraud. A control procedure, no matterhow well conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control procedure are met. Because of theinherent limitations in all control procedures, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within the Company have been detected. These inherent limitations includethe realities that judgments in decision-making can be faulty, and thatbreakdowns in controls or procedures can occur because of simple error ormistake. Additionally, controls can be circumvented by the individual acts ofsome persons, by collusion of two or more people, or by management override ofthe control. The design of any control procedure also is based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions; over time, controls may become inadequate becauseof changes in conditions, or the degree of compliance with the policies orprocedures may deteriorate. Because of the inherent limitations in acost-effective control procedure, misstatements due to error or fraud may occurand not be detected.

 

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**PART II – OTHER INFORMATION**

 

**Item1.   LegalProceedings**

 

Neither Trinity, theBank nor Title Guaranty are involved in any pending legal proceedings which, inthe opinion of management, in the aggregate, are material to our consolidatedfinancial condition.

 

**Item 2. UnregisteredSales of Equity Securities and Use of Proceeds**

 

None

 

**Item3.  Defaults Upon Senior Securities**

 

None

 

**Item4.  Submission of Matters to aVote of Security Holders**

 

At the Annual Meeting ofStockholders held on May 26, 2005, Jerry Kindsfather, Steve W. Wells and RobertP. Worcester were elected to serve as directors of the Company until the 2008Annual Meeting.  The stockholdersapproved the adoption of the Trinity Capital Corporation 2005 Stock IncentivePlan and the Trinity Capital Corporation 2005 Deferred Income Plan.  In addition, the stockholders ratified theappointment of Neff & Ricci LLP as the Company’s independent auditors for2005.

 

The voting for each matterwas as follows:

 

1.                                       Election of directors:

 
| **NOMINEE**         | ** ** | **FOR**   | ** ** | **WITHHOLD** | ** ** |
|---------------------|------------|-----------|------------|--------------|------------|
| Jerry Kindsfather   |       | 4,700,356 |       | 371,152      |       |
| Steve W. Wells      |       | 5,066,648 |       | 20,860       |       |
| Robert P. Worcester |       | 5,061,274 |       | 26,234       |       |

 

**2.**                                       Adoptthe Trinity Capital Corporation 2005 Stock Incentive Plan:

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|
| 4,745,307 |       | 57,728      |       | 284,473     |       |

 

**3.**                                       Adoptthe Trinity Capital Corporation 2005 Deferred Income Plan:

** **
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|
| 4,761,511 |       | 41,265      |       | 284,732     |       |

 

**4.**                                       Ratifythe appointment of Neff & Ricci LLP as the Company’s independent auditorsfor the fiscal year ending December 31, 2005:

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|
| 5,002,599 |       | 18,956      |       | 65,953      |       |

 

**Item5.  OtherInformation**

 

None

 

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**Item6.  Exhibits**

 

31.1         Certification of Chief Executive OfficerPursuant to Rule 13a-14(a)/15d-14(a)

31.2         Certification of Chief Financial OfficerPursuant to Rule 13a-14(a)/15d-14(a)

32.1         Certification of Chief Executive OfficerPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

32.2         Certification of Chief Financial OfficerPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

99.1         Indenture for Trinity Capital Corporation asissuer of Trust Preferred Securities, dated June 29, 2005

 

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**SIGNATURES**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused thisregistration statement to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| ** **            | **TRINITY CAPITAL CORPORATION** |
|-----------------------|---------------------------------|
| ** **            | ** **                      |
| ** **            | ** **                      |
| Date: August  9, 2005 | By:                             | /s/ WILLIAM C. ENLOE |
|                  |                            | William C. Enloe  President and Chief Executive Officer |
|                  |                            |   |
| Date: August 9, 2005  | By:                             | /s/ DANIEL R. BARTHOLOMEW |
|                  |                            | Daniel R. Bartholomew  Chief Financial Officer |

 

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